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Economic analysis of Property Law

Economic analysis of Property Law. Lecture 6: Patents v. prizes. 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

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Economic analysis of Property Law

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  1. Economic analysis of Property Law Lecture 6: Patents v. prizes

  2. 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)

  3. Monetary prizes • Rarely used in the past • Longitude prize • Even more rarely used today

  4. 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

  5. Problems • International coordination • Corruption or opportunistic behaviour • Fairness • Asymmetric information

  6. 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

  7. Baseline model

  8. 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

  9. 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

  10. 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

  11. Patents

  12. 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

  13. Prizes

  14. Prizes

  15. Asymmetric information

  16. Asymmetric information

  17. Asymmetric information

  18. Comparison

  19. Special cases: d= 0 • With no deadweight losses, the patent system is always preferable

  20. Special cases: vH=vL • With no asymmetric information, the prize system is always preferable

  21. General comparison

  22. 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

  23. 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

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