The Scope and Organization of Production: Blah Blah Blah (with Alberto Galasso and Gabor Virag) (Revise and Resubmit, IJIO)
Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify new reward mechanisms which complement the patent system and reduce prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government’s innovation policy, and are also widely implemented by private philanthropists. In this paper we describe situations in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent’s life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives.
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In markets where prices are low and choices are vast, consumers rely on intermediaries to provide information about products. Examples include blogs, paid twitter endorsements, and even search engine results. One way to monetize advice is to mix “genuine” advice with paid advice. This paper studies such an intermediary of information, who can either give good advice or monetize the opportunity to give good advice. The relationship between adviser and advisee evolves between periods of good and bad advice, and ultimately in breakup. Competition can be good or bad for the market for advice. If consumers must learn if a recommendor has good advice to give, there are two tensions between incentives and experimentation.
This paper considers the optimal design of patent rights for sequential innovations in an oligopoly. Firms contribute sequentially with unobserved efforts that transform ideas into improvements on a quality ladder. The optimal patent mechanism trades off incentives to encourage innovation efforts at different points in time. The optimal provision of incentives leads to strong asymmetries in the allocation of patent rights to firms and excludes all but one successful innovator in the limit. Treatment of the ex ante identical firms is ex post discriminatory. A simple implementation of the optimal mechanism with a system of patent fees is provided. Under an alternative policy arrangement, the allocation can be interpreted as optimal regulation of competition for the market.
This paper considers a moral hazard problem where the output is a design. The design refers to something whose value is subjective, possibly difficult to describe, and can be returned if the principal views it as unsatisfactory. Correlation of the principal's signal with the his true value plays a role, in contrast to standard principal agent problem; experience goods are different from credence goods. The principal's ability to forecast value corresponds to a notion of taste for the principal that distinguishes taste from judgment. The importance of “taste” impacts the cost of contracting as well as the type and number of agents contracted with. For examples where taste is relevant, uncertainty in the outcome may make the incentive contract less costly. Negative correlation between principal and agent's signals can sometimes be valuable; this can be interpreted as a value in “bad” taste of the principal. The results can be applied to the use of termination in dynamic relational contracts.