Glen Weyl and Jean Tirole Ask: What Is the Best Way to Reward Innovation?

By TAP Staff Blogger

Posted on February 17, 2015


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Economists Glen Weyl, currently a researcher at Microsoft Research New England and on leave from the University of Chicago, and Jean Tirole, Scientific Director of the Institut d'Economie Industrielle and President of the Toulouse School of Economics, worked together to explore systems for rewarding innovation. Their article, “Market Power Screens Willingness-to-Pay,” investigates the trade-off between two systems for stimulating innovation: establishing intellectual property rights (patents, copyrights, and trademarks); and, awarding prizes (such as a Nobel, John Bates Clark Medal, etc.).


Glen Weyl discussing “Market Power Screens Willingness-to-Pay:”

We argue that the trade-off between patents and prizes (I would argue between an important aspect of capitalism and an important one of socialism) is all about whether the potential entrepreneur has information about the value of products that are not held by the government or by individuals more broadly.


In their article, Professors Weyl and Tirole discuss the implementation of their mechanism in three contexts: government-granted incentives for innovation, such as patents and prizes; rewards by platforms, such as operating systems, to developers of applications – paying an upfront fee (prize-like) or allowing the developer to set a price for their application (effectively granting them IP-rights); and the procurement of public infrastructure, a long-term approach linking builder compensation to actual revenue derived from the end-user is shown as a best practice.


Market Power Screens Willingness-to-Pay” by E. Glen Weyl and Jean Tirole is available to download on SSRN. It was published in the Quarterly Journal of Economics in 2012.



Glen Weyl Talks about Collaborating with Jean Tirole


TAP reached out to Professor Weyl to ask about his experiences working with Professor Tirole. Though at the time their article was published, Professor Tirole had yet to receive the Nobel Prize in Economic Science (he received this prestigious honor in 2014), Professor Weyl says, “Jean has been a favorite, if not the favorite, for many years now. While he is too modest to admit it, he has done more to shape the course of economics since the early 1980's than anyone else in the field.”


Teaming Up Over Two-Sided Markets

How did you meet and begin working with Professor Tirole?


I met Jean Tirole in the summer of 2006. I was an undergraduate at Princeton University and was working with Roland Bénabou, one of Jean's co-authors. I had become interested in industrial economics, but no one at Princeton worked on this topic. Roland told me to talk to Jean, who was teaching at a behavioral economics summer camp I attended that summer. At the time I was working on a topic that Jean was the world expert on: two-sided markets. Jean generously took me aside for a long and detailed conversation; and then invited me (while still an undergraduate!) to fly that December to Toulouse to give my first-ever presentation in economics.


From that time forward Jean brought me for one month every year to work with him in Toulouse. Toulouse became a second home to me. Jean and I wrote “Market Power Screens Willingness-to-Pay” during this time. And we have other projects in progress.


Professor Tirole’s Influence on Economics

Professor Weyl offers his thoughts on the significance of Professor Tirole’s work in several areas of economics.


Market Regulation

Jean's research speaks to the most fundamental issues in economics in the 20th century: is central planning or a decentralized market system the best way to organize production and exchange? Jean's work with Jean-Jacques Laffont was the first to formalize the idea that the market economy is desirable to the extent that regulators have insufficient information to accurately plan the economy. Jean's research, as a result, played a crucial role in the fundamental restructuring of economies around the world, away from centralized regulation and towards more competitive systems.


However, unlike many other economists, Jean is not a simple supporter of the free-market. He is constantly analyzing the trade-offs between different modes of economic organization. His research rejects simplistic dichotomies between markets and states, instead considering the real structures that matter: who controls resources, who makes decisions about innovation and production and what are these individuals' incentives.


Jean's recent work on information technology and platform industries is a perfect example, showing us how large firms like Google act themselves as regulators of a vast ecosystem of applications, advertisements and internet surfers.


Regulation

Jean’s work on regulation emphasizes that regulation and competition are two different ways to achieve a competitive outcome. The real difference between them, and that which is most beneficial, depends on who holds the relevant information about a firm’s profits: the firm’s potential competitors, the firm alone, or the government. Depending on the case, different industrial organizations will be desirable.


Industrial Organization

Jean's most important contribution is probably his work to solidify the field of industrial organization into a coherent theoretical discipline. It would be no exaggeration to say that this book, The Theory of Industrial Organization, is the handbook by which competition policy is conducted around the world today, and by which many of the most successful deregulatory efforts have proceeded.


More concretely, one of Jean's most famous papers, and one that had a tremendous influence on me, highlighted how many firms in the economy do not directly sell to consumers but instead offer a "platform" on which other consumers interact, such as eBay's marketplace or Visa's credit card payment system. This work has created an enormous literature that I have been blessed to participate in, and has shown how different competition and regulation issues are in these markets.


Breaking Down Boundaries between Markets and States

Many of Jean’s papers have been about breaking down the boundaries between markets and states, and examining how a social system processes information. For example, his most cited paper “Formal and Real Authority in Organizations” (with Philippe Aghion) is about how authority to make decisions is irrelevant if the formal decision-maker relies on the private information of others consistently to make decisions. While she may have a formal right to decide, the true decision-maker is the one whose private information consistently influences her decision-making. In this sense, whether the government or markets have “power” is not really relevant. What matters is the way in which information is processed and whose information is taken into account, to what extent, when, and through which incentive mechanisms.


The Experience of Working with Professor Tirole

Jean is, with absolutely no doubt, the kindest, most generous, most modest, and most available economist I know in the entire profession. He is also unbelievably brilliant, efficient, and prolific.


My conversations with Jean were some of the most interesting of my life. He was continuously able to cut to the core of any issue we were discussing, while simultaneously tying together many strands of literature. When he turned his mind to writing, he could, in the course of a few days, turn a sloppy manuscript into a polished article. In every sense of the word, I believe that he is best economist living today.



Glen Weyl

Glen Weyl is a Researcher at Microsoft Research New England, where he does research in economics, law and related fields, including philosophy and the history of economics. He is on leave as an Assistant Professor of Economics and Law at the University of Chicago. Professor Weyl’s primary intellectual interests are in pure and applied price theory, with a focus on industrial organization and public economics, as well as the intersection between economics and other disciplines, particularly law, intellectual history and philosophy.


Glen Weyl received an Alfred P. Sloan Foundation Research Fellowship for 2014-16. It is awarded “to early-career scientists and scholars whose achievements and potential identify them as rising stars.” And he was highlighted by Pacific Standard as one of the Top 30 Thinkers Under 30 (2014).



Jean Tirole

Jean Tirole is the Scientific Director of the Institut d'Economie Industrielle (IDEI); President of the Toulouse School of Economics (TSE); and a visiting professor at the Massachusetts Institute of Technology. His research focuses on industrial organization, regulation, competition policy, antitrust, corporate finance, and game theory.


In 2014, Professor Tirole was awarded the Nobel Memorial Prize in Economic Science for his analysis of market power and regulation. Also in 2014, he was awarded the Erwin Plein Nemmers Prize in Economics and in 2013 he was given the Stephen A. Ross Prize in Financial Economics.


TAP graciously thanks Professor Glen Weyl for sharing his time and insights from his collaboration with Professor Jean Tirole.

 


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