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Economic analysis of Property Law
Lecture 6: Patents v. prizes
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Monetary prizes
• Patents may be viewed as a right to tax an innovative good conferred on the inventor
• Governments may retain the right to tax as compensate inventors by means of monetary prizes
• Advantages– Efficient taxation miminizes deadweight losses to
raise any given fiscal revenue– No upper bound on the level of reward (sequential or
complementary innovations)
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Monetary prizes
• Rarely used in the past– Longitude prize
• Even more rarely used today
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Prizes in innovation races or contest
• In a race, the target is pre-specified and the timing is not
• In a contest, there is a time deadline but no pre-specified target– The prize accrues to whoever has made the
biggest progress by the deadline
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Problems
• International coordination
• Corruption or opportunistic behaviour
• Fairness
• Asymmetric information
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Asymmetric information
• Two types of innovation, big and small
• When choosing R&D investment, R&D firms know the value of innovation
• When setting the prize level, the government does not know the value of innovation
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Baseline model
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Two types
• v can be high (vH) or low (vL) with probability q and (1-q), respectively
• To simplify the algebra I set q = ½
• The bigger is the difference vH vL , the more important is asymmetric information
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Comparison
• We compare an optimal patent system with an optimal prize system
• Thus, we must first determine the optimal patent and the optimal prize, and then compare
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Patents
• We apply the standard analysis we are already familiar with
• Optimal patent life is a half of L, irrespective of the value of innovation
• This is the strength of the patent system: no need of knowing the value of innovation to set optimal patent life
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Patents
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Prizes
• I denote the monetary prize by P• I suppose raising fiscal revenue entails no
deadweight loss (all that matters is that deadweight losses are lower than with patents)
• Consider first the case of a single innovation of value v
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Prizes
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Prizes
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Asymmetric information
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Asymmetric information
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Asymmetric information
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Comparison
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Special cases: = 0
• With no deadweight losses, the patent system is always preferable
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Special cases: vH vL
• With no asymmetric information, the prize system is always preferable
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General comparison
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Combination
• We can also consider a combination of patents and prizes
• The policymaker can offer a menu of options, letting inventors choose their most preferred combination
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Patent/prize combination
• When the innovation is large, inventor will choose a small prize/ long patent combination
• When the innovation is small, he will pick up a short patent/big prize combination