Creator: Chari, V. V., Golosov, Mikhail, and Tsyvinski, Aleh Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 673 Abstract:
Innovative activities have public good characteristics in the sense that the cost of producing the innovation is high compared to the cost of producing subsequent units. Moreover, knowledge of how to produce subsequent units is widely known once the innovation has occurred and is, therefore, non-rivalrous. The main question of this paper is whether mechanisms can be found which exploit market information to provide appropriate incentives for innovation. The ability of the mechanism designer to exploit such information depends crucially on the ability of the innovator to manipulate market signals. We show that if the innovator cannot manipulate market signals, then the efficient levels of innovation can be implemented without deadweight losses–for example, by using appropriately designed prizes. If the innovator can use bribes, buybacks, or other ways of manipulating market signals, patents are necessary.
Keyword: Innovations, Mechanism design, Patents, Prizes, and Economic growth Subject (JEL): O31 - Innovation and Invention: Processes and Incentives, D86 - Economics of Contract: Theory, O34 - Intellectual Property and Intellectual Capital, D82 - Asymmetric and Private Information; Mechanism Design, O40 - Economic Growth and Aggregate Productivity: General, and D04 - Microeconomic Policy: Formulation, Implementation, and Evaluation