Information Costs in Property, Intellectual Property, and Organizations

Innovation and Economic Growth

Article Snapshot


Henry Smith


Searle Center Research Symposium on Property Rights Economics and Innovation Research Paper, 2008


This paper looks at how intellectual property and physical property law help people solve complex problems.

Policy Relevance

Innovation is a complex problem, and patent, copyright, and other property rules help solve this problem.

Main Points

  • Property law, which excludes people from using things that do not belong to them, helps people manage information by delegating decisions to the owner. Those likely to know most about a resource use it; no one else has to bother thinking about it much.
    • Simple property rules let people trade resources when they need to.

  • It can be costly to negotiate deals and make decisions jointly (transaction costs) and property law reduces the need for this.

  • Some problems about how resources are used cannot be solved by exclusion alone; “governance” is needed, to decide questions like whether someone can use loud machinery near others’ homes (nuisance law).

  • Complexity can be managed by a modular system. Inside each part or module, complex interactions occur, while interaction between the parts can be kept more simple. Property law, intellectual property law, and organizations make markets modular.

  • Organizations like firms are collections of contracts, but some see them as something more.  It makes sense to handle complex tasks like designing software using modules, and firms work the same way.
    • Firm’s assets, legal personalities, capital structure, and other aspects rely on law to allow for the creation of standard “modules.”

  • In intellectual property, exclusion works differently because it is hard to block access to information and sharing has many benefits. So complex overlapping between property boundaries arises, such as fair use in copyright. Costly conflicts are likely to arise, because one use does not exclude another.

  • In patent law, property rules are not just important to encourage creation, but mainly make it easier for the process of commercializing an invention to go forward by setting out rules of the road for the many actors and assets involved.

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