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Employed inventors, inter-firm mobility, bonus pay with multi-stage R&D processes, and optimal innovation policy

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A temporary change in pay to employed inventors around the time of patent application has been observed in a number of countries. A theoretical model is here developed to provide an explanation to said findings based on the idea that inventors may be able to use the knowledge previously generated while working in a firm, in a rival company. The model features firms who hire workers in R&D functions to make product innovations. The innovation process consists of distinct phases separated by a patent application. Firms compete to attract workers, and workers can transfer part of the generated new knowledge to a new employer. Results suggest that the capital intensity of R&D investments, and the type and size of knowledge spillovers, may affect the probability to observe bonus pay at the time of a patent application. Different tax incentives and subsidies are then studied as a means to correct for possible under-investment of capital. We study the effect of a patent box, a subsidy to R&D capital investments, and a subsidy to bonus pay. When market rivalry prevails over positive knowledge externalities, a bonus pay incentive was found to obtain the social first-best while a patent box or a subsidy to capital investment would cause overinvestment. When positive knowledge externalities prevail, either a patent box or a subsidy to capital investment obtain the social optimal level of capital investments.

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File URL: https://ec.europa.eu/jrc/sites/jrcsh/files/jrc104088.pdf
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Paper provided by Joint Research Centre (Seville site) in its series JRC Working Papers on Taxation & Structural Reforms with number 2016-02.

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Length: 25 pages
Date of creation: Dec 2016
Handle: RePEc:ipt:taxref:201602
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  1. Pakes, Ariel & Nitzan, Shmuel, 1983. "Optimum Contracts for Research Personnel, Research Employment, and the Establishment of "Rival" Enterprises," Journal of Labor Economics, University of Chicago Press, vol. 1(4), pages 345-365, October.
  2. Diego d'Andria & Ivan Savin, 2015. "Motivating innovation in a knowledge economy with tax incentives," Jena Economic Research Papers 2015-004, Friedrich-Schiller-University Jena.
  3. Ufuk Akcigit & Salomé Baslandze & Stefanie Stantcheva, 2016. "Taxation and the International Mobility of Inventors," American Economic Review, American Economic Association, vol. 106(10), pages 2930-2981, October.
  4. Katharina Eckartz & Oliver Kirchkamp & Daniel Schunk, 2012. "How do Incentives affect Creativity?," Jena Economic Research Papers 2012-068, Friedrich-Schiller-University Jena.
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  7. Thomas Hellmann & Veikko Thiele, 2011. "Incentives and Innovation: A Multitasking Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 78-128, February.
  8. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
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