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Prizes and Patents: Using Market Signals to Provide Incentives for Innovations

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  • V. V. Chari
  • Mikhail Golosov
  • Aleh Tsyvinski

Abstract

Innovative activities have public good characteristics in the sense that the cost of producing the innovation is high compared to the cost of producing subsequent units. Moreover, knowledge of how to produce subsequent units is widely known once the innovation has occurred and is, therefore, non-rivalrous. The main question of this paper is whether mechanisms can be found which exploit market information to provide appropriate incentives for innovation. The ability of the mechanism designer to exploit such information depends crucially on the ability of the innovator to manipulate market signals. We show that if the innovator cannot manipulate market signals, then the efficient levels of innovation can be implemented without deadweight losses - for example, by using appropriately designed prizes. If the innovator can use bribes, buybacks, or other ways of manipulating market signals, patents are necessary.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 814577000000000398.

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Date of creation: 01 Dec 2009
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Handle: RePEc:cla:levarc:814577000000000398

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Cited by:
  1. Mitchell, Matthew & Zhang, Yuzhe, 2012. "Shared Rights and Technological Progress," MPRA Paper 36537, University Library of Munich, Germany.
  2. Michael Kremer & Heidi Williams, 2010. "Incentivizing Innovation: Adding to the Tool Kit," NBER Chapters, in: Innovation Policy and the Economy, Volume 10, pages 1-17 National Bureau of Economic Research, Inc.
  3. Acemoglu, Daron, 2012. "Introduction to economic growth," Journal of Economic Theory, Elsevier, vol. 147(2), pages 545-550.

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