Intellectual Property: When is it the Best Incentive Mechanism?

Innovation and Economic Growth and Intellectual Property

Article Snapshot


Nancy Gallini and Suzanne Scotchmer


Innovation Policy and the Economy, Vol. 2, Adam Jaffe, Joshua Lerner & Scott Stern eds., MIT Press, pp.51-778


This article looks at different ways of rewarding innovation, including patents.

Policy Relevance

Patents are often a good way to encourage innovation, but prizes and other alternatives can avoid high prices associated with patents and sometimes might work better.

Main Points

  • Innovators can gain a reward for their invention based on intellectual property (IP) such as patents, or rely on trade secrets, business advantages, prizes, government grants, auctions, procurement contracts, or use encryption technology to ensure they are paid.

  • Using IP to reward invention does not make sense when both the costs and benefits known, because IP gives monopoly power and raises prices. When both costs and benefits are known, it makes sense to use tax money.

  • The benefit of IP when costs and benefits are partly unknown, are that private investors screen investments more wisely than government; the cost of invention is borne privately; and private investors work harder or faster to get an exclusive reward.
    • Licensing and how long a patent is in force affect its benefits to others.

  • Sometimes, prizes work better than IP. The World Health Organization is considering prizes for developing vaccines for illnesses common in poor countries.

  • Inventors build on the work of other inventors, so innovation is cumulative. IP scholars debate how to the first inventor’s need for a reward with the next inventors’ needs.

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