1. Economic analysis of Property Law
Lecture 6: Patents v. prizes

2. Monetary prizes
Patents may be viewed as a right to tax an innovative good conferred on the inventor
Governments may retain the right to tax as compensate inventors by means of monetary prizes
Advantages
Efficient taxation miminizes deadweight losses to raise any given fiscal revenue
No upper bound on the level of reward (sequential or complementary innovations)

3. Monetary prizes Rarely used in the past Even more rarely used today
Longitude prize
Even more rarely used today

4. Prizes in innovation races or contest
In a race, the target is pre-specified and the timing is not
In a contest, there is a time deadline but no pre-specified target
The prize accrues to whoever has made the biggest progress by the deadline

5. Problems International coordination
Corruption or opportunistic behaviour
Fairness
Asymmetric information

6. Asymmetric information
Two types of innovation, big and small
When choosing R&D investment, R&D firms know the value of innovation
When setting the prize level, the government does not know the value of innovation

7. Baseline model

8. Two types
v can be high (vH) or low (vL) with probability q and (1-q), respectively
To simplify the algebra I set q = ½
The bigger is the difference vH - vL , the more important is asymmetric information

9. Comparison
We compare an optimal patent system with an optimal prize system
Thus, we must first determine the optimal patent and the optimal prize, and then compare

10. Patents We apply the standard analysis we are already familiar with
Optimal patent life is a half of L, irrespective of the value of innovation
This is the strength of the patent system: no need of knowing the value of innovation to set optimal patent life

11. Patents

12. Prizes I denote the monetary prize by P
I suppose raising fiscal revenue entails no deadweight loss (all that matters is that deadweight losses are lower than with patents)
Consider first the case of a single innovation of value v

13. Prizes

14. Prizes

15. Asymmetric information

16. Asymmetric information

17. Asymmetric information

18. Comparison

19. Special cases: d = 0
With no deadweight losses, the patent system is always preferable

20. Special cases: vH = vL
With no asymmetric information, the prize system is always preferable

21. General comparison

22. Combination We can also consider a combination of patents and prizes
The policymaker can offer a menu of options, letting inventors choose their most preferred combination

23. Patent/prize combination
When the innovation is large, inventor will choose a small prize/ long patent combination
When the innovation is small, he will pick up a short patent/big prize combination