۱- Introduction

۲- Related literature

۳- Commitment issues with innovation prizes

۴- The model

۵-Innovation policies

۶- Comparing the different policy regimes

۷- Diverting resources toward low-welfare investments

۸- Concluding remarks

References

Abstract

This paper compares the performance of a variety of innovation policy instruments when the government cannot commit to transfer cash rewards to an innovator and has the option to divert resources to alternative investments. In a dynamic environment in which government’s investment opportunities evolve stochastically, we provide conditions under which the optimal mechanism is a price regulation system where the inventor owns intellectual property and receives a cash transfer when price equals marginal cost. We illustrate how a dynamic complementarity between cash rewards and intellectual property may arises when the government’s budget is limited and monopoly distortions are not too severe. We discuss how other forms of complementarity between cash transfers and intellectual property may emerge, with patent rights serving as a discipline device that ensures the payment of the reward.

Introduction

A central class of problems in the economics of innovation literature examines the role of government policies to incentivize R&D investments and the development of new products. Traditionally, the literature has studied this issue comparing a variety of policy tools in situations where the innovator has an information advantage over the government in understanding the quality of new products (Scotchmer, 1999; Shavell and Ypersele, 2001). This paper departs from this standard modelling approach and focuses instead on situations where the government faces a commitment problem. Specifically, we examine the performance of innovation policies in a model where the planner cannot commit to transferring resources to the innovator and faces the option to divert its budget to alternative welfare-generating projects. The use of innovation prizes has increased substantially during the past decade with a large number of philanthropists entering the business of rewarding innovators (McKinsey, 2009). The Gates Foundation, Qualcomm and Nokia have offered multi-million dollar prizes for children immunization and the development of affordable medical devices. In the public sector, one of the most important examples of innovation prizes is the 2004 Darpa Grand-Challenge in which a $1 million prize was offered to the team that built a self-driving car that drove 150 miles through the Mojave Desert the fastest.