Big Science and Big Funding Some big projects: Super collider in Texas, $7b Space Station, $100bDRUGS?! $0.8b Gravity Probe X, Some reorganizations we have heard about: How to save NASA Why should we save NASA? Some historical publicly funded Big Projects Transatlantic telegraph, Tycho Brahe & the stars The Big Question about Big Projects: Should we fund them? How do we know?

Cost-Benefit Analysis: An Economists’ Tool Do the benefits, say v/r, outweigh the costs, say c? What are the benefits? What are the costs? (What if the project will fail with probability p?) What is an “option value” and how does it enter? How does uncertainty enter? For that matter, what is uncertainty? What if experts assign different probabilities? What determines if these benefits are appropriable? Tycho Brahe, telegraph, space station, mars probe

Science and Technology What is the difference? Basic and applied research? The benefit of applied research is appropriable... …. Does that mean it should be appropriated? We fund basic science and applied technology in different ways. Basic science requires taxation and public commitment of funds. Technology mostly funded by giving intellectual property. Big question: If the benefits of invention can be appropriated, should funding be private?

What does IP do in the market? excludes users cs p m dw software users п patented software product, mc=0 without a patent, what would price be?

Patents as an incentive mechanism Intellectual property is a legal right to exclude users. Does this solve the appropriability problem? Virtue: IP provides at least a weak efficiency test as to whether the value of investment exceeds cost Defect: IP does a bad job of delegating effort –It does not privilege the more efficient firms –It does not regulate entry and duplication Defect: IP leads to deadweight loss Virtue: IP concentrates costs among the users Defect? Do patents inhibit the sharing of knowledge?

Prizes as an incentive mechanism Historically common and still common Examples: Longitude, mathematics prizes, silk-weaving industry Defect: Unclear how to set the value of the prize. Related to costs? Related to benefits? (Compare with patents) Defect: Like patents, prizes do a bad job of delegating effort –It does not privilege the more efficient firms –It does not regulate entry and duplication Defect: Everyone pays (is this a defect? drugs?) Virtue: Avoids deadweight loss Virtue: May encourage the sharing of knowledge Defect: Sponsor might not think of good research projects?

Grants as an incentive mechanism NSF: 99% research budget given as grants (NSF also supports education) NIH: about 80% given out as grants Would you grant-supported R&D to be different than in-house R&D? Why? What is the point of grant support? How does NSF/NIH know whom to support? What constraints on abuse are there?

A simple Model of the Grant Process Suppose an “idea” worth funding costs c. Suppose it is impossible to punish a grantee for cheating (not delivering), e.g., by getting the money back. The only punishment is to kick a researcher out of the grant system. Suppose that each researcher has an idiosyncratic “idea rate,” ideas per year Who does the NSF want to support? Should it depend on the “idea rate” ? What is the objective? Let be the size of a grant for a given idea. How large should be? E.g., =c? Does the NSF/NIH have to “waste money” in order to keep researchers from cheating?

Keeping Grantees Honest: the grant size  Value of ideas in period t: The value of staying in the system (future grants): Invest if the value of cheating, c, is less than value of future grants (selects the high-fertility researchers)

Questions about grants: If researchers have “fertile minds” (high ), what does that do to the premium -c? How much surplus does a high-cost researcher make? What if you are a low-fertility (low- )? Will the government have to “over pay?” Homework: If the government could give different for researchers with different, would high fertility researchers get larger or smaller grants per idea? Would they get more or less money per unit time?

Government Subsidies for Private R&D Methods: 1. Tax rebates 2. Direct subsidies 3. Contract research 4. Funds matching in universities Why subsidize? 1. Deficient IP or other incentives. 2. Unappropriable public benefits. 3. Use industry expertise What are the “dangers” of subsidizing R&D? Waste money on worthless projects.

New Hybrids: IP on government-sponsored research. Is there a rationale for granting IP on government-subsidized research? What is the argument against this? s=subsidy, m=firm matching requirement, v=value,  vT=profit cost, funds, profit

Does the matching scheme: Waste funds on worthless projects? End up giving away IP rights on discoveries for which the subsidy itself is enough funding? Get the firms to select the best projects? Overcome the problem of deficient IP incentives where there are unappropriable third-party benefits?

Two models for making publicly funded knowledge available Commercialization Model Bayh-Dole Act, Stevenson-Wydler Act 1980 Grantee (researcher) can patent Does this make sense? Does it even help with R&D costs? (UCB: 1999, $1.5b R&D budget, 1% from licensing) Free Access Model: Disseminate at the cost of reproducing the knowledge.

Intellectual Property: The Legal Regimes Intellectual Property has a Constitutional basis in the USA Resolved conflicts among the original 13 states at the Constitutional Convention Patents (mostly manufactured items) 20 years, has a “breadth” requirement Copyrights (traditionally literary and artistic works) Protects expression, not function and not ideas has “fair use” exceptions – single copies, quotation, parody narrow protection, but lasts a long time Trade Secrets independent invention is a threat Sui Generis laws: Plant Variety Protection Act Semiconductor Chip Protection Act of 1984 Database protection (proposed in US; mandated in Europe)

Patents The gold standard of protection No exemptions Patents have breadth “doctrine of equivalents” History: The monopoly was not necessarily to protect invention, but to protect imports

Plant Patent Act and Plant Variety Protection Act Asexually versus sexually reproducing PVPA: exemption for research 20 years Database Protection Semiconductor Chip Protection Act