| Abstract: |
Innovative activities have public good characteristics in the sense that the
cost of producing the innovation is high compared to the cost of producing
subsequent units. Moreover, knowledge of how to produce subsequent units is
widely known once the innovation has occurred and is, therefore,
non-rivalrous. The main question of this paper is whether mechanisms can be
found which exploit market information to provide appropriate incentives for
innovation. The ability of the mechanism designer to exploit such information
depends crucially on the ability of the innovator to manipulate market
signals. We show that if the innovator cannot manipulate market signals, then
the efficient levels of innovation can be implemented without deadweight
losses - for example, by using appropriately designed prizes. If the innovator
can use bribes, buybacks, or other ways of manipulating market signals,
patents are necessary. |