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 systemThere 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 roleThere are other ways of providing returns on knowledge than patents– Trade secrets, first mover advantageThere 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 systemspatent prize Government

funded

selection Decentralized, self-selection

•Lacks coordination

Decentralized, self-selection

•Lacks coordination

“bureaucratic”

•But can be more coordinated

Finance (tax) Highly distortionary and inequitable

Can be less distortionary and more equitable

Most efficient

risk Litigation risk Less risk Least risk

Innovation incentives

Strong but distorted

Strong, less distorted

Cannot work when objective is not well-defined

Dissemination incentive

Limited--monopoly Strong—using competitive mkts

Strong

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

countriesThese reforms may create a more dynamic and a more

equitable global economy