Working Paper: NBER ID: w20197
Authors: Alberto Galasso; Matthew Mitchell; Gabor Virag
Abstract: Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify alternatives to patents that could lower prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government's innovation policy, and are also widely implemented by private philanthropists. In this paper we develop a model in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy in our model still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent's life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives in our model.
Keywords: patents; innovation; market outcomes; buyouts; incentives
JEL Codes: O30; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| patent buyouts (L24) | marginal and total willingness to pay of consumers (D11) |
| patent buyouts (L24) | innovation incentives (O31) |
| reward structure (J33) | social welfare (I38) |
| market outcomes (P42) | adjustment of rewards (J33) |
| adjustment of rewards (J33) | innovation incentives (O31) |
| manipulation of sales by innovators (O31) | true market conditions (D41) |
| buyout scheme (J65) | incentivizes innovation (O31) |
| optimal policy transitions (C61) | competitive pricing (L11) |