Incentive mechanism for innovations

Topics: Patent, Invention, Innovation Pages: 43 (11293 words) Published: June 12, 2014
IAPR Technical Paper Series

Incentive mechanisms for innovation

Aidan Hollis∗
Department of Economics
University of Calgary
June 2007
Technical Paper No. TP-07005
Institute for Advance Policy Research
University of Calgary
Calgary, Alberta

James Love got me started on this project and I have appreciated his encouragement and his criticisms. The paper has benefited from the comments of my colleagues at the University of Calgary, particularly those of Curtis Eaton. Contact information – Email:; Telephone: (403) 220 5861. © by author. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit is given to the source.


Incentive Mechanisms for Innovation

Incentive mechanisms for innovation
Aidan Hollis
Department of Economics
University of Calgary
June 2007

Using a simple model of innovation, I compare patents, research grants, targeted prizes, and ex post prizes and explore their interaction. I then introduce a new incentive mechanism for innovation, provisionally labeled optional broad rewards, or OBRs, and examine its characteristics. I explore the interaction of OBRs with the patent system and suggest some specific settings in which OBRs may be useful.



Incentive Mechanisms for Innovation

1. Introduction
Innovation is at the core of economic growth, and so designing incentives which will enable greater innovation should be at the core of government policy. Unfortunately, the mechanisms commonly used – patents, research grants, and prizes – are incomplete and imperfect, much like other social institutions. In particular, when patents do not enable the innovator to appropriate a significant share of the benefits of his or her invention, they cannot be an effective incentive mechanism. I introduce a new incentive mechanism for innovation, provisionally labeled optional broad rewards, or OBRs, and examine its characteristics. OBRs offer payments in place of the exclusive use of the innovation disclosed in the patent. OBRs represent an alternative way of being rewarded for an innovation, and, in combination with the patent system, OBRs may be very useful in some specific settings.

An illuminating example of incomplete appropriability under the patent system is the chemical DCA, which was recently reported to be very effective at destroying a wide set of cancers in mice (Bonnet et al, 2007). This molecule is already used to treat lactic acid buildup and cardiac ischemia in humans, so that its side effects are relatively well known. As such, it has been hailed as a very exciting prospect. The only problem is that it is already available in the marketplace. While a firm may be able to obtain a patent for the use of DCA as a treatment for cancer, it would be unable to prevent other firms from selling DCA, and as such would be unable to appropriate much (if any) of the value of the innovation. This could lead to slow or incomplete clinical trials: as a leading cancer scientist at the Canadian Institutes of Health Research asked, “But who's going to pay for



Incentive Mechanisms for Innovation

the clinical trials ... it’s $70 million to $100 million.”1 These trials may not be successful and there is no commercial advantage from this investment, so no company has an incentive to undertake the trials. This means that trials must be financed by government, which may lack a process for deciding whether to fund clinical trials.2 There are many prospective innovations for which the patent system simply does not create adequate incentives for investment in R&D. For example, malaria kills at least one million people annually, most of them under five years old, and most in sub-Saharan Africa, and there are approximately 400m clinical episodes of malaria annually, suffered mainly by poor people...

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