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
Canada
http://www.iapr.ca



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: ahollis@ucalgary.ca; 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.

Hollis

Incentive Mechanisms for Innovation

Incentive mechanisms for innovation
Aidan Hollis
Department of Economics
University of Calgary
ahollis@ucalgary.ca
June 2007

Abstract
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.

1

Hollis

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

2

Hollis

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...

References: Abramowicz, M., 2003, “Perfecting patent prizes.” Vanderbilt Law Review; Jan 2003;
56(1): 114-236.
Bessen, J. and M. Meurer, 2007, “The private cost of patent litigation.” Boston
University School of Law Working Paper 07-08.
Bonnet, S. et al, 2007, “A mitochondria-K+ channel axis is suppressed in cancer and its
normalization promotes apoptosis and inhibits cancer growth.” Cancer Cell 11(1):
Boyce, J.R. and A. Hollis, 2007, “Preliminary Injunctions and damage rules in patent
law.” Journal of Economics & Management Strategy, 16(2): 385-405.
Cockburn, Iain M. and Rebecca Henderson, 2000, "Publicly Funded Science and the
Productivity of the Pharmaceutical Industry," Innovation Policy and the Economy, 1:
Cohen, W., R. Nelson and J. Walsh, 2000, “Protecting their intellectual assets:
appropriability conditions and why U.S
Hollis, A., 2005. “An optional reward system for neglected disease drugs.” Unpublished
manuscript, Department of Economics, University of Calgary.
Kremer, M., 1998. “Patent Buyouts: A Mechanism for Encouraging Innovation.”
Quarterly Journal of Economics 113: 1137–67.
Kremer, M. and R. Glennerster, 2004. Strong Medicine: Creating Incentives for
Pharmaceutical Research on Neglected Diseases
Krohmal, B., 2007. “Prominent Innovation Prizes and Reward Programs.” KEI Research
Note
accessed June 6, 2007.
Krupnick, A., 2004. “Valuing Health Outcomes: Policy Choices and Technical Issues.”
Resources for the Future, Washington.
Mankiw, N.G. and M. Whinston, 1986. “Free Entry and Social Inefficiency.” Rand
Journal of Economics 17(1): 48-58.
Masters, W.A., 2005. “Research prizes: a new kind of incentive for innovation in African
agriculture.” International Journal of Biotechnology 7 (1/2/3): 195-211.
Miller, J., 2004. “Building a better bounty: litigation-stage rewards for defeating patents.”
Berkeley Technology Law Journal 19(2): 667-739.
Incentive Mechanisms for Innovation
National Research Council, 2007
Newell, R. and N. Wilson, 2005. “Technology prizes for climate change mitigation.”
Resources For the Future Discussion Paper 05-33.
Pogge, T., 2005. “Human rights and global health: a research program.” Metaphilosophy
36 (1/2): 182-209.
Polanvyi, M., 1943. “Patent reform.” Review of Economic Studies 11(2): 61-76.
Scherer, F.M., 2006, “The political economy of patent policy reform in the United
States.” Unpublished manuscript, Harvard University.
Scherer, F.M., 1980. Industrial Market Structure and Economic Performance. Boston:
Houghton Mifflin.
Scotchmer, Suzanne, 2004. Innovation and Incentives. Cambridge: MIT Press.
Shavell, S. and T. van Ypersele, 2001, “Rewards vs. Intellectual Property Rights.”
Journal of Law and Economics, XLIV: 525-547.
Smith, A., 1763, Lectures on Jurisprudence, R.L. Meek, D.D. Raphael, and P.G. Stein,
eds., Oxford University Press, 1978.
Tsao, J., 1989, “Consumer preferences and funding priorities in scientific research.”
Science and Public Policy 16(5): 294-298.
World Health Organization, 2005, World Malaria Report 2005. Geneva.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Innovation Essay
  • Innovation Essay
  • Innovation Essay
  • innovation report Essay
  • innovations Essay
  • Innovation Essay
  • Innovation Essay
  • Innovation Essay

Become a StudyMode Member

Sign Up - It's Free