Alternative ways for financing and incentivizing research: a Nobel laureate and his colleagues state their case

Is the current patent system the best way to encourage meaningful research? From the vantage of economics, views both pro and con have been expressed. Does societal welfare in the aggregate benefit from the grant of a temporary monopoly to the patentee (in most instances, the patentee being other than the inventor)? Does the patent system incentivize research? How should be research be financed? In considering these questions, one notable challenge to the current patent system has been mounted by the Nobel laureate in economics, Professor Joseph Stiglitz. Stiglitz is no ivory tower academic. Not only is his work on the economics of information path-breaking, but he served between the years 1997-2000 as the Chief Economist of the World Bank. He was one of the first to spot the economic and political threat posed by increasing inequality in the Western World. When Stiglitz suggests that all is not well with the current patent system, his is a voice to which attention should be paid.

An accessible presentation of his views can be found in the recent report, “Innovation, Intellectual Property, and Development", co-authored with economist Dean Baker and Professor Arjun Jayadev, published under the auspices of AccessIBSA: Innovation & Access to Medicines in India, Brazil & South Africa, a project supported by the Shuttleworth Foundation. The report focuses on the developing world and how the patent system impacts on the pharmaceutical industry and agriculture. But, as the authors state, their observations are of more general applicability both with respect to inventions and creative works, and to the patent system as it is applied in the developed world. As such, they write--
“The underlying problem is that knowledge is a (global) good—in the technical sense that the marginal cost of someone using knowledge is zero, and, as is usually the case, the market undersupplies public goods. Creating private monopolies is just one route for solving the problem and incentivizing and financing research”.
And what might be other routes? In the words of the authors, there are “a variety of ways of financing and incentivizing research, within the current dispensation, many of which are in use today in different countries and contexts”. The authors suggest four such alternatives, including the current dominant paradigm. This Kat sets out these alternatives and summarizes some of the pros and cons of each.

1. Direct financing through centralized mechanisms –a government agency directly finances research or a creative work.

—(i) It is perhaps the best way to finance basic research; (ii) the outputs can be made freely available; (iii) the research is more open and accelerates the R&D process; and (iv) there are no upfront costs to be recouped as with a monopolist.

Cons—(i) It is a questionable way to develop end products; (ii) it is likely to be overly bureaucratic and slow-moving in responding to changes; and (iii) it is subject to the whims in the availability of public funds and to political interference.

2. Decentralized direct funding mechanisms –research or creative work is directly supported and incentivized through a decentralized mechanism, primarily a tax credit.

Pros-- (i) The tax credit applies to incremental spending to maximize the incentive to increase spending in R&D; (ii) there is no government bureaucracy in the decision-making; (iii) tax credits effectively lower the cost of R & D; and (iv) the decision-making process can react more quickly to changes.

Cons—(i) How to ensure that the tax subsidy is sufficiently large and well structured; (ii) there may remain large gaps between private and social returns to research.

3. A prize financing system –a governmental body or a private entity awards a prize for successful innovation. It maintains most of the structure of a decentralized patent prize system; the difference is that government would buy up some (or all) of the patents and puts them in the public domain.

Pros—(i) It allows for innovation to be used at its marginal cost after the buyout; (ii) (maybe) as a condition, the patent holder could be required to disclose relevant research findings; and (iii) the government can purchase essential drugs, with the result that such drugs are available at prices near their cost of production, also putting downward pressure on the prices of the drugs not so purchased.

Cons—(i) How to price the prize; (ii) the prize would have to be in an amount equal to or greater than the expected value of the future profits if the patent monopoly in the market would be in place for the duration of the patent; and (iv) researchers who may have made breakthroughs, but not the key patent, could receive nothing for their efforts.

4. Patent ‘prize’ financing decentralized system – It is the predominant mechanism of government support for research. The “prize” is a government monopoly that allows the holder to charge prices in excess of the free market price for the term of the monopoly.

Pros – (i) It allows companies to recoup their research costs by monopoly pricing for the duration of the patent; and (ii) the monopoly incentive may encourage research spending.

Cons- (i) It may reduce, as well as add, to the pool of knowledge that others can draw upon; (ii) the monopoly may serve to reduce incentives to invest in R & D; (iii) it results in a form of government- sponsored research, where the difference between the price and the marginal cost is in effect a “tax,” the proceeds of which are enjoyed by the patentee; (iv) such patent revenues constitute perhaps the largest expenditure on research; (v) it encourages excessive secrecy in the research process; (vi) it leads to duplicative research and unnecessary expense; and (vii) it fosters an excess concern with competitors.

We IP types tend to be a conservative lot, largely set in our ways. The authors are anything but this. But they are not starry-eyed idealists; their proposals are rooted in actual experience. Do we, as an IP community, ignore them at our peril?

By Neil Wilkof

Picture on top right by Louis Glanzman, under a Creative Commons license,

Picture on lower left by Jonatan Svensson Glad
Alternative ways for financing and incentivizing research: a Nobel laureate and his colleagues state their case Alternative ways for  financing and  incentivizing research: a Nobel  laureate and his colleagues state their case Reviewed by Neil Wilkof on Monday, February 05, 2018 Rating: 5


  1. How often shall it be said: There is NO Nobel prize for economics. There is a price of the Sveriges Riksbanks - the Swedish central bank - in commemoration of Alfred Nobel. The correct title is: Sveriges Riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne. So Mr Stiglitz is NO Nobel laureate.

    It is one of the biggest intellectual catastrophies of the last century that this was allowed - and as has been proven right by the aftermath of Lehman, also one of the biggest financial catastrophies, and we are now victims of the political consequences...

    There are a few real nobel laureates which have been active in IP, one good example is Peter Grünberg. Maybe the IPKAT should focus on those?

  2. The "pro" of 1 has been negated by actual history and the abysmal failure of most nearly ALL "central planning (read that as communist) political systems.

    The notable exception (but not an exception) would be China.

    Having personally studied in China, I can tell you that the communism there has fully embraced the aspects of capitalism that are evident (now) in the STRENGTHENING of their patent system.

    Given this VERY obvious error at the onset - I will pass on further investigation of time for this author.

  3. the way - the entirely discredited views of Bessen and Meuer are taken as gospel by the authors of this paper.

    There is little of value to see here.

    Move along.

  4. (i) It may reduce, as well as add, to the pool of knowledge that others can draw upon
    Really? It can certainly increase it, since most applications are published, and are usually enabling.

    (ii) the monopoly may serve to reduce incentives to invest in R & D
    Again, really? Again, it can certainly increase them, by protecting the researcher from competitive free-riders.

    (iii) it results in a form of government-sponsored research, where the difference between the price and the marginal cost is in effect a “tax,” the proceeds of which are enjoyed by the patentee.
    Taxes are nomrally state-set, state-levied and collected, and there is nomrally an element of compuslsion by the state to pay the tax. Under this definition of taxation, ground rent, lease of equipment, licensing of a work, and so on and so forth, is also tax. To follow this requires a rather nebulous definition of "tax". Riding the bus to work becomes a tax on employment, wearing clothes becomes a tax on appearing in public, laws on child protection and safety become a tax on having children...

    (iv) such patent revenues constitute perhaps the largest expenditure on research
    Really? I know of no organisation that expends a significant proportion of their R&D budget on patent licenses. To the extent a company pays (indirectly) for patented technology buy buying patented goods or services, that is becuase the company ahs evaluated those goods or services against others in the marketplace and concluded that they represent value for money.

    (v) it encourages excessive secrecy in the research process
    Really? The authors should try speaking to those working in arts where patent protection is difficult to achieve, or where the product can outlive the patent and be successfully kept secret. Just ask Dargon for details of its voice-recognition algorithms, or Coke for details of its secret recipe.

    (vi) it leads to duplicative research and unnecessary expense;
    Everything in life leads to unneceesary expense. Duplicative research in fact rarely exists; rather, often times researchers come up with similar but distinct solutions. Both of these represet contributions. The publication fucntion of the patent process also avoids reinventing the wheel, and encourages re-use of existing research.

    (vii) it fosters an excess concern with competitors.
    Who in business is unconcerned about their competitors? Excess concern with competitors is otherwise known as a highly competitive marketplace, which tends to drive quality up and costs down.



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