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Rewarding Sequential Innovators: Patents Prizes and Buyouts

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  • Matthew Mitchell

    (University of Minnesota)

Abstract

This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that, contrary to the existing literature, have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1650.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1650

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  1. Richard Gilbert & Carl Shapiro, 1990. "Optimal Patent Length and Breadth," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 106-112, Spring.
  2. Francesca Cornelli & Mark Schankerman, 1999. "Patent Renewals and R&D Incentives," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 197-213, Summer.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  4. Steven Shavell & Tanguy van Ypersele, 1999. "Rewards versus Intellectual Property Rights," NBER Working Papers 6956, National Bureau of Economic Research, Inc.
  5. Jerry R. Green & Suzanne Scotchmer, 1995. "On the Division of Profit in Sequential Innovation," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 20-33, Spring.
  6. Suzanne Scotchmer & Jerry Green, 1990. "Novelty and Disclosure in Patent Law," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 131-146, Spring.
  7. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  8. Ted O'Donoghue & Suzanne Scotchmer & Jacques-François Thisse, 1998. "Patent Breadth, Patent Life, and the Pace of Technological Progress," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 1-32, 03.
  9. Tandon, Pankaj, 1982. "Optimal Patents with Compulsory Licensing," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 470-86, June.
  10. Suzanne Scotchmer, 1999. "On the Optimality of the Patent Renewal System," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 181-196, Summer.
  11. Wright, Brian Davern, 1983. "The Economics of Invention Incentives: Patents, Prizes, and Research Contracts," American Economic Review, American Economic Association, vol. 73(4), pages 691-707, September.
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Cited by:
  1. Erkal, Nisvan & Scotchmer, Suzanne, 2009. "Scarcity of Ideas and R&D Options: Use it, Lose it, or Bank it," Berkeley Olin Program in Law & Economics, Working Paper Series qt74c709qr, Berkeley Olin Program in Law & Economics.
  2. Ufuk Akcigit & William R. Kerr, 2010. "Growth through Heterogeneous Innovations," PIER Working Paper Archive 10-035, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Denicolo, Vincenzo & Zanchettin, Piercarlo, 2002. "How should forward patent protection be provided?," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 801-827, June.
  4. Alexandre Almeida & Aurora A.C. Teixeira, 2007. "Does Patenting negatively impact on R&D investment?An international panel data assessment," FEP Working Papers 255, Universidade do Porto, Faculdade de Economia do Porto.
  5. Encaoua, David & Guellec, Dominique & Martinez, Catalina, 2006. "Patent systems for encouraging innovation: Lessons from economic analysis," Research Policy, Elsevier, vol. 35(9), pages 1423-1440, November.
  6. Yuzhe Zhang & Matthew Mitchell, 2013. "Shared Rights and Technological Progress," 2013 Meeting Papers 678, Society for Economic Dynamics.

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