Incentive mechanism for innovations

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: [e-mail]; Telephone: [phone]. © 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 [e-mail] 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

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.