Intellectual Property Versus Prizes: A Policy-Lever Analysis

Abstract

Most developed nations rely on intellectual property as one of their primary tools to promote private investments in R&D. An alternative approach is for the government to reward innovators with a prize instead of an intellectual property right, such that innovations fall immediately into the public domain. This idea dates back centuries, but over the past decade there has been an explosion of scholarship on the subject. Policymakers and even the press have started to talk about use prizes as an alternative to intellectual property – particularly for prescription drugs. In the scholarly literature, it is generally assumed that eliminating intellectual property rights would result in prices closer to marginal cost, thereby reducing deadweight loss. The standard objection to prize proposals is that the government might offer the wrong reward for innovation. Scholarship on the prize system largely focuses on design mechanisms to ensure that the government offers appropriate rewards to innovators. This article examines the growing literature on the prize system and reaches several conclusion about the choice between intellectual property and prizes. First, the proponents of the prize system have made a respectable case that the government could acquire sufficient information about innovations to calculate an appropriate prize. Several scholars have taken this argument too far, however, concluding that prizes are superior to intellectual property in part because they offer better incentives for innovation. This argument is mistaken because any mechanism to calculate rewards under a prize system could also be used to supplement or tax profits under intellectual property, resulting in the same outcome. The prize system therefore cannot be justified as a way to improve the incentives for innovation provided by intellectual property.