To IP or Not to IP?

Is the current concentration of effort toward the identification and licensing of intellectual property (IP) the best method to stimulate innovation? In a period seeing increased pressures on public research universities to identify alternate sources of funding, IP opponents may find economic considerations obfuscating the innovation argument: 

• The most recent survey from the Association of University Technology Managers (AUTM) found the commercialization of academic research in 1999 resulted in more than $40 billion in economic activity that supported more than 270,000 jobs and generated $5 billion in tax revenues in the U.S. at the federal, state, and local levels. In 1999 alone, more than 3,900 new licenses were signed with businesses including 12 percent to start-ups, 50 percent to small businesses, and 38 percent to large companies. See: http://www.autm.net 
• A July report from the General Accounting Office found, with the rapid decline after 1995 in financial support Congress provided to encourage industry partnerships such as Cooperative Research and Development Agreements (CRADAs), federal labs turned increasingly to licensing technology as the primary form of partnership. The number of licenses more than tripled from 1995 to 2001; at the same time, the number of CRADAs declined by more than 60 percent. See: GAO-01-568 at http://www.gao.gov/

Professors Nancy Gallini of University of Toronto and Suzanne Scotchmer of the University of California, Berkeley, however, argue in Intellectual Property: When is it the best incentive system? that alternative mechanisms for rewarding innovation may be superior to intellectual property in certain situations. 

For example, the authors say "when both the costs and values of innovation are publicly observable to both firms and a public sponsor, intellectual property is not the best incentive scheme...To justify intellectual property, there must be some type of asymmetrical information about the costs and benefits of research programs." 



The use of prizes, stipends or other one-time payments may be more fruitful with innovations whose value is most apparent to the sponsoring government entity, such as military procurements. Gallini and Scotchmer, then, consider the use of alternate incentives to intellectual property to encourage the development of vaccines to avoid monopoly pricing and stimulate further innovation. Exclusive licensing and patents, they argue, can be particularly debilitating to future innovation in areas where advancements are cumulative (e.g., an AIDS vaccine). Could a prize or one-time reimbursement/fee be more beneficial? 



They conclude: 

• "IP is probably the best mechanism for screening projects when value and cost are not observable by the sponsor, since the private value of IP automatically reflects the social value, and firms automatically compare some measure of value to the cost of innovation. In addition, IP encourages firms to accelerate progress, since the reward is conditional on success. Prizes could serve the same purposes if the size of the prize could be linked to the social value and without the deadweight loss of monopoly pricing. 
• "Neither IP nor prizes can aggregate the information that is decentralized among firms, and neither will be completely effective at delegating research effort efficiently. A procurement system that restricts prizes to certain firms, or differentiates prizes according to firms’ relative efficiencies, can improve on a simple prize system or patent system, but then there must be an ex ante negotiation to select the favored firms." 
• They also advise Congress, the courts, and IP designers to recognize that "one size doesn't fit all" concerning intellectual property; length, breadth and standard for protection vary across industry sectors, potential applications, and innovations. 

Intellectual Property: When is it the best incentive system? will be a chapter in the second volume of Innovation Policy and the Economy (forthcoming). The working paper of the chapter, updated May 6, 2001, is available for download at http://www.nber.org/books/innovation2/gallini5-14-01.pdf