ECONOMIC FOUNDATIONS OF

INTELLECTUAL PROPERTY RIGHTS

Towards an Agenda for the New
Administration

Trans Atlantic Consumer Dialogue Workshop

Washington, D.C.
January 12, 2009

Joseph E. Stiglitz
 Innovation of Key Importance to
American Economy
• Financial Sector has been battered
– Viewed as highly innovative
– But innovation was not directed at enhancing overall economic
efficiency
– Partly related to distorted incentives, partly related to failure of
government to perform its role
– Sector didn’t manage risk, allocate capital well
• Maintaining Hi-tech, research sectors, and more generally
maintaining an innovation economy, is central to America’s
long run success
– Distortions in incentives, failure of government may be undermining
this vital sector
– Reforms are badly needed
 Similar source of failings
• Reliance on simplistic economic models
• That did not understand role of
government
• Influenced by corporate interests
– Economic ideology used to buttress those
interests
 Global Perspectives
• Our aggressive pursuit of “strong”
(TRIPS+) intellectual property (e.g. data
exclusivity) has hurt developing countries
and undermined our global standing (“soft
power”)
– Reinforcing adverse image
– Putting corporate profits before more
fundamental values
 Outline
• Role of intellectual property
• Adverse effects on static efficiency
– Key concept: knowledge as a global public good
• Adverse effects on dynamic efficiency
• Other problems of patent system
• A Portfolio Approach towards Constructing an
Innovation System
 The role of intellectual property
• Part of society’s innovation system
• To provide incentives to innovate
– By allowing innovator to restrict use of that knowledge
– Thereby obtaining a return on his investment in knowledge
• There are other parts of society’s innovation system
There are other ways of financing and producing research
– Universities, government supported research labs
– Open source movement
– Financial returns are only part of incentive system of scientists
– In many areas of research (basic science) patents play small role
There are other ways of providing returns on knowledge than patents
– Trade secrets, first mover advantage
There could be still other ways of providing incentives
– Prizes
 Key question
• The role of the patent system within this broader innovation
system
• The design of the patent/ipr regime
– What can be patented, breadth of patent, standard of novelty, etc.
– Procedures for granting patents/challenging patents
– Rules for patent enforcement
– Responsibilities as well as rights—requirements for disclosure
– Restrictions—not to engage in abusive anti-competitive behavior;
compulsory licenses
• How these questions are answered can affect the efficiency
of the economy and its innovativeness
– There are large costs to the current patent system
– Are there reforms which would improve its efficiency?
 IPR and static inefficiency
Knowledge as a public good
• Fundamental problem is that knowledge is
a public good
– In fact, it’s a global public good
• no marginal cost associated with use
• intellectual property circumscribes its use
and thus necessarily causes an
inefficiency
 But not only does IP create a
distortion by restricting the use of
knowledge
• They create an even worse distortion—a (temporary)
monopoly power
– Social costs of distortion especially high in the case of life-saving
drugs
– IPR is often used to leverage (further) monopoly power (Microsoft)
• Long history--automobile
• Ordinarily, property rights are argued for as a means of
achieving economic efficiency
– Intellectual property rights, by contrast, result in a static
inefficiency, justified by the dynamic incentives
– Any method of raising funds has a social cost, but patent system
is not “optimal” way of raising money (not optimal tax)
• Recent advances in industrial organization suggest that
costs may be far higher than previously thought
– Schumpeter was wrong about temporary nature of monopoly
– Monopoly power once established can easily be perpetuated,
i.e. it may create persistent monopoly power
– Particularly evident in case of network externalities, switching
costs (including “learning”)
– Other impediments to research posed by patent system
• And that benefits may be lower than previously thought
– Incentives for R & D may be less
– Distortions in the direction of research
 Further costs
• High administrative costs (patent suits)
• High levels of uncertainty
– Intrinsic uncertainty of research
– Compounded by risk of patent infringement
• Risk of litigation
• An inefficient way of raising revenues to
finance research
 Losses of dynamic efficiency

• Question—can one obtain dynamic benefits at lower

static costs?
• Worry: The patent system may even be slowing down
the pace of innovation
• Fundamental problem: rewards do not correspond to
marginal social returns
– Marginal social return is having the innovation available earlier
than it otherwise would have been
• Contrast clear in case of human genome project
– Much of returns can arise from “enclosing commons”
• In this case there is a cost, but no benefit
• Evident in controversy over bio-piracy
 Why patents may slow innovation
• Knowledge is the most important input into the production of knowledge
– Especially of concern when patents involve ‘enclosing the commons’
– Intellectual property rights restrict access to knowledge
• Incentives for innovation with monopoly less than in more competitive
market place
– Monopolist can increase profits by discouraging innovation by rivals
and raising rivals costs (Microsoft)
• Patent conflict (patent thickets) can impede innovation
– Development of the commercial airplane
– Boundaries of “property rights” raise difficult problems
• Important to develop further theory of design of ipr with fuzzy boundaries
• Patent races may not be the spur to innovation once
thought (Stiglitz, 1988, Dasgupta and Stiglitz)
• Issue is not just level of research, but direction
– Much of R &D activity directed at circumventing or
strengthening monopoly
– Not at creating new products and lowering
costs which enhance welfare

IMPLICATION: STRONGER INTELLECTUAL PROPERTY

RIGHTS MAY NOT LEAD EVEN TO FASTER PACE OF
INNOVATION
 PROMOTING INNOVATION
THROUGH STRENGTHENING
OUR INNOVATION SYSTEM
Key tasks facing Innovation system
• Selection of projects and researchers
• Financing
– Knowledge is not costless, so there has to be
some way of financing it
• Risk absorption
• Incentivizing
• Dissemination
 Key attributes in evaluating
different parts of innovation system
• How well they perform these roles
• Costs they impose on the economic system
– Patent system’s high transactions costs
– Transactions costs
• Well designed innovation system will be a mixed
system—a portfolio approach
– But are we relying too heavily on the patent system?
– And is the patent system well designed for achieving
the objectives?
 Critique of patent system
Besides large static and dynamic distortions
• Finance
• Bias towards excessive patenting
• Inequities
• Problems posed by legal system
• Concerns of developing countries
 Finance
• REVENUES FOR RESEARCH
PROVIDED BY MONOPOLY PROFITS
• DIFFERENCE BETWEEN PRICE AND
MARGINAL COST CAN BE VIEWED AS
A ‘TAX’
– ONE DESIRABLE PROPERTY: ‘BENEFIT
TAX’
– BUT IN MOST OTHER ARENAS, ONLY
LIMITED RELIANCE ON BENEFIT TAXES
• INEFFICIENCY AND INEQUALITY
 Bias towards excessive patenting
• Fighting a patent creates a public good
(open access)
• While patenting knowledge makes a public
good private
• There will be underinvestment in fighting
bad patents
• Problem can be exacerbated by bad
procedures
– Europe’s processes may be preferable
 INEQUITIES ASSOCIATED
WITH IPR
• KNOWLEDGE AS A GLOBAL PUBLIC
GOOD
• SHOULD BE FINANCED BY THOSE MOST
ABLE TO PAY
• IPR DOES NOT RECOGNIZE
DIFFERENCES IN CIRCUMSTANCES—
OTHER THAN EXTENT TO WHICH
PROFITS CAN BE EXTRACTED
 LEGAL SYSTEM CAN LEAD TO
UNFAIR OUTCOMES
• HIGH COSTS OF IMPLEMENTING IPR
• INCLUDING HIGH COSTS OF CHALLENGING
PATENTS
– PUTS DEVELOPING COUNTRIES AT A DISADVANTAGE
– EXACERBATING RISKS OF BIO-PIRACY
• PRESSURE NOT TO ISSUE COMPULSORY
LICENSES AND TO HAVE STRONG IPR REGIMES
REINFORCED BY INTERNATIONAL ECONOMIC
INSTITUTIONS AND ‘MARKET’
 Concerns of developing countries
• KNOWLEDGE AS A GLOBAL PUBLIC GOOD
– SHOULD BE FINANCED BY THOSE MOST ABLE TO PAY
– IPR DOES NOT RECOGNIZE DIFFERENCES IN CIRCUMSTANCES—
OTHER THAN EXTENT TO WHICH PROFITS CAN BE EXTRACTED
• CURRENT SYSTEM PROVIDES LITTLE INCENTIVES FOR R & D ON
DISEASES THAT AFFLICT THEM
– PART OF PROBLEM OF BEING POOR IS THAT YOU CAN’T PAY
MUCH
• WHAT SEPARATES DEVELOPING AND DEVELOPED COUNTRIES IS
GAP IN KNOWLEDGE
– TRIPS HAS MADE IT MORE DIFFICULT TO CLOSE THAT GAP
– TRIPS should never have been part of WTO
• AT THE SAME TIME, PROVIDES LITTLE PROTECTION FOR
THEIR INTELLECTUAL PROPERTY (BIO-PIRACY,
PROTECTION OF BIODIVERSITY)
• DEVELOPING COUNTRIES HAVE CALLED
FOR A DEVELOPMENT ORIENTED
INTELLECTUAL PROPERTY REGIME
– There is no reason to expect that the design
of an IPR system which balances costs and
benefits which is optimal for the U.S. would be
optimal for a developing country
– WTO could have provided effective
flexibilities, in the case of life saving
medicines, if it had wanted to
 PRIZE SYSTEM AS AN
ALTERNATIVE
• Current system is a prize system
– Prize is monopoly power
– Monopoly power means that there are incentives to restrict use
of knowledge
• Prize associated with actuarial value of the social
benefits, with licensing
– Competitive market would ensure more efficient dissemination
– Without waste on advertising, other anti-competitive behaviors
design to enhance monopoly profits
– Prize could be “contingent”—related to sales
– Contingent purchase funds preserve monopoly system
 Comparing alternative systems
patent prize Government funded

selection Decentralized, self- Decentralized, self- “bureaucratic”

selection selection •But can be more
•Lacks coordination •Lacks coordination coordinated

Finance (tax) Highly distortionary Can be less Most efficient

and inequitable distortionary and
more equitable
risk Litigation risk Less risk Least risk

Innovation Strong but distorted Strong, less Cannot work when

incentives distorted objective is not well-
defined
Dissemination Limited--monopoly Strong—using Strong
incentive competitive mkts
Transaction costs high
 Conclusions
• The importance of IPR has been exaggerated
• IPR needs to be seen as port of a portfolio of instruments
• We need to strengthen the other elements of this portfolio
– Including making more extensive use of prizes
– Obama has emphasized role of investments in stimulus
– Investments in R & D, basic research, and technology need to
be given more prominence
– Can address social needs, both in health and environment
– Need global cooperation to support research that is of
importance to developing countries
• We need to address other failings in our innovation system
– Testing of drugs/medicines
 Conclusions
• We need to redesign IPR to increase its benefits, reduce its
costs
– Encouraging open source
– Reduce bias towards overpatenting
– Introduce liability system
– Reduce scope for evergreening
– Reduce scope for bio-piracy
 Conclusions
• We need to create a development oriented intellectual
property regime
– Recognizing that intellectual property should not be included
in trade agreements
– Recognizing the concerns of developing countries for the
protection of traditional knowledge
– Recognizing the importance of closing the knowledge gap
– Attentive to differences in circumstances of different countries
These reforms may create a more dynamic and a more
equitable global economy