Switching from Patents to an Intertemporal Bounty in a Non-Scale Growth Model

Lin, Hwan C. (2012): Switching from Patents to an Intertemporal Bounty in a Non-Scale Growth Model.

Abstract

The prize system for innovation has been criticized as impractical due to the lack of a workable formula or algorithm to determine the size of prizes. In this paper, a decentralized market mechanism via the intertemporal bounty (IB) system can function to duplicate Pareto optimality. Under this system, any bountiable innovation is placed in the public domain, and the prize of innovation is dynamically amortized in an infinitely time domain as periodic bounties paid to holders of bounty claims. Periodic bounties are calculated using a government-determined bounty rate times observed market sales. Two formulas are derived to calculate “long-run Pareto optimal bounty rate” and “long-run suboptimal bounty rate.” The former can correct monopoly distortions and externalities, while the latter can only address monopoly distortions. They are empirically computable and can serve as an upper bound and the lower bound of the bounty rate. This paper provides a dynamic general-equilibrium analysis of replacing finitely-lived patents with the IB system using either of these two bounty rates. Based on a non-scale growth model calibrated to the US economy, transition paths are worked out to compute welfare gains.

• Item Type: MPRA Paper
• Language: English
• Keywords: Patent, Prize, Bounty Claim, Innovation, Growth, Transitional Dynamics
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63 - Computational Techniques ; Simulation Modeling; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O34 - Intellectual Property and Intellectual Capital

References

[1] Abramowicz, M. 2003. “Perfecting patent prizes.” Vand. L. Rev., 56, 1-126.

[2] Basu, S. 1996. “Procyclical productivity: increasing returns or cyclical utilization?” Quarterly Journal of Economics, 111, 709 - 751.

[3] Bodrin, M., and D. K. Levine. 2013. “The Case against Patents.” Journal of Economic Perspectives, 27, 3-22.

[4] Chu, A. C. 2010. “Effects of patent length on R&D: a quantitative DGE analysis.” Journal of Eco- nomics, 99, 117-140.

[5] Comin, D. 2004. “R&D: A small contribution to productivity growth.” Journal of Economic Growth, 9, 391-421.

[6] Eicher,T.S. and S. J. Turnovsky. 2001. Transitional dynamics in a two-sector non-scale growth model,” Journal of Economic Dynamics and Control, 25, 85 - 113.

[7] Grinols, E. and J. Henderson. 2007. “Replace Pharmaceutical Patents Now,” PharmacoEconomics, 25, 355-363.

[8] Grinols, E. L. and H. C. Lin. 2006. “Global Patent Protection: Channels of North & South Welfare Gain,” Journal of Economic Dynamics & Control, 30, 205-227.

[9] Grinols, E. L. & H. C. Lin. 2011. “Patent replacement and welfare gains.” Journal of Economic Dynamics and Control. Vol. 35, Issue 9, 1586-1604.

[10] Grossman, G. M., and E. Helpman. 1991. “Quality ladders in the theory of growth.” Review of Economic Studies 58, 43-61.

[11] Grossmann, Volker, T. Steger and T. Trimborn. 2013. “Dynamically optimal R&D subsidization.” Journal of Economic Dynamics and Control, 37, 516-534.

[12] Guell, R. C. and M. Fischbaum. 1995. “Toward allocative efficiency in the prescription drug industry.” The Milbank Quarterly, 73, 213-230.

13] Helpman, E. 1993. “Innovation, imitation, and intellectual property rights.” Econometrica, 61, 1247- 1280.

[14] Hopenhayn, H., G. Llobet, and M. Mitchell. 2006. “Rewarding Sequential Innovators: Prizes, Patents, and Buyouts,” Journal of Political Economy, 114, 1041-1068.

[15] Judd, K. L. 1985. “On the Performance of Patents,” Econometrica, 53, 567-85.

[16] Jones, C. I. 1995. “R&D-Based Models of Economic Growth,” Journal of Political Economy, 103, 759-84.

[17] Jones, C. I. and J. C. Williams. 1998. “Measuring the Social Return to R&D.” Quarterly Journal of Economics, 113, 1119-1135.

[18] Jones, C. I. and J. C. Williams. 2000. “Too much of a good thing? The economics of investment in R&D,” Journal of Economic Growth , 5 (1), 65 - 85.

[19] Kaplow, L. 1996. “The optimal supply of public goods and the distortionary cost of taxation, ”National Tax Journal, 49, 513-533.

[20] Klemperer, P. 1990. “How Broad Should the Scope of Patent Protection Be?” RAND Journal of Economics, 21, 113-30.

[21] Kremer, M. 1998. “Patent Buyouts: A Mechanism for Encouraging Innovation,” Quarterly Journal of Economics, 113 (4), 1137-1167.

[22] Mansfield, E., M. Schwartz, and S. Wagner. 1981. “Imitation costs and patents: an empirical study.” Economic Journal, XCI, 907-918.

[23] Mansfield, E., J. Rapoport, A. Romeo, S. Wagner, and G. Beardsley. 1977. “Social and private rates of return from industrial innovations.” Quarterly Journal of Economics, 91, 221-240.

[24] Matutes, C., P. Regibeau, and K. Rockett. 1996. “Optimal patent design and the diffusion of innovations.” RAND Journal of Economics, 27, 60-83.

[25] Nordhaus, W. D. 1969. Invention, Growth, and Welfare. Cambridge, MA: MIT Press.

[26] Norrbin, S. C. 1993. “The relation between price and marginal cost in US industry: a contradiction.” Journal of Political Economy, 101, 1149 - 1164.

[27] O’Donoghue, T. and J. Zweimüller. 2004. “Patents in a model of endogenous growth.” Journal of Economic Growth, 9, 81-123.

[28] Polanvyi, M. 1944. “Patent reform.” Review of Economic Studies, 11, 61-76.

[29] Rivera-Batiz, L. A. and P. M. Romer. 1991. “Economic integration and endogenous growth. ”Quarterly Journal of Economics, 106, 531–555.

[30] Romer, P. M. 1990. “Endogenous technological change.” Journal of Political Economy,98,S71-S102.

[31] Scotchmer, S. 1999. “On the optimality of the patent renewal system.” RAND Journal of Economics, 30, 181-196.

[32] Shampine, L. F., P.H. Muir, and H. Xu. 2006. “A user friendly Fortran BVP Solver.” Journal of Numerical Analysis, Industrial and Applied Mathematics, 1, 201-217.

[33] Shavell, S. and T. van Ypersele. 2001. “Rewards versus intellectual property rights.” Journal of Law & Economics, 44 (2), 525-547.

[34] Williams, H. L. 2013. “Intellectual property rights and innovation: evidence from the human genome,” Journal of Political Economy, 121, 1-27.

[35] Wright, B. D. 1983. “The economics of invention incentives: Patents, prizes, and research contracts.” American Economic Review, 73, 691-707.