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.

Pros—(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, public-domain.zorger.com

Picture on lower left by Jonatan Svensson Glad