This document discusses the economics of intellectual property from three perspectives: the incentive theory, patterns of productivity theory, and issues around duplicative research efforts. The incentive theory aims to balance incentives for innovation with the inefficiencies created by intellectual property restrictions. The patterns of productivity theory examines how intellectual property affects market signals guiding resource allocation for innovation. Addressing duplicative research efforts could help minimize the waste of innovative resources. In conclusion, the economics of intellectual property is complex and countries may need different intellectual property approaches depending on their situations and intellectual property should be considered alongside broader socioeconomic issues.

1. S W A R A J P A U L B A R O O A H
E - P A T H S H A L A
I N T E L L E C T U A L P R O P E R T Y
M O D U L E 4
Economics of Intellectual
Property: Innovation and
Creativity – Policy Linkages

2. 1. Introduction
 IP’s role in modern society cannot be understated.
Important shaper of how new technologies are
created, distributed and accessed.
 It was not long before the Law and Economics
movement led to the economic analysis of IP
 First wave of scholars – Focused on IP as drivers of
economic activity
 Second wave scholars – Placed IP within broader
societal context.

3. 2. Economic Analysis
 Four major schools of thought on IP – Natural
Rights theory, Personhood theory, Social Welfare
Theory, and Utilitarian Theory.
 Economic analysis focuses on Utilitarian theory –
two questions:
 What is ‘maximum social welfare’
 How can this be applied to IP law and policy
 Maximum social welfare – “Kaldor Hicks” or
“Wealth Maximization”

4. 2. Economic Analysis
 3 methods of applying this to IP policy
 Incentive theory – Efficiency gains (from greater rate of
innovation) > deadweight losses + informational loss
 Property Rights as optimal determinants of consumer welfare
enhancing patterns of productivity
 Reducing duplicative or uncoordinated research / innovation
activity

5. Public and Private Goods
 Public Goods, such as “information” are non-
rivalrous and non-excludable in nature.
 Non-rivalrous good: Can be used/consumed infinite number of
times without loss in good.
E.g.: An apple is a rivalrous good. Once consumed, it cannot be
consumed by anyone else. A book is a non-rivalrous good. It
can be read over and over again.
 Non-excludable good: Usage by multiple parties (at a time) is
not restricted.
E.g,: A book cannot be used by many people at the same time.
The light from a lighthouse can be.

6. Public and Private Goods

7. 2.1 Incentive theory
 Therefore information goods are most efficiently
used when they are freely and widely consumed.
 However, if freely and widely consumed, how does
one recuperate investments made in creating such
information good? Especially when easy to reverse
engineer and re-construct.
 Logical corollary is little incentive to create
information goods
 To create incentives, artificial legal restrictions are
created –> IPRs.

8. 2.1 Incentive theory
 Allowing IPRs = allowing inefficiencies (since
information good is most efficiently used when no
restrictions are present).
 By imposing restrictions (price barriers or otherwise)
on who can access the good, ‘static inefficiencies’ are
created.
 However, rent earned through IPRs can serve as
incentive for ‘faster rate of innovation’ than would
have occurred without IPRs. This is called ‘dynamic
efficiency’.

9. 2.1 Incentive theory
 Incentive theory therefore focuses on calibrating
IPRs such that static inefficiencies are minimized
and dynamic efficiencies are maximixed.
 Critiques:
 Does not take into account non-monetary incentives
 Has to go against trend of harmonization
 Does not take into account distributional concerns

10. 2.2 Patterns of Productivity theory
 Other incentive generating mechanisms exist, such
as ‘prize systems’, ‘commons based approach’, etc,
which do not have the same ‘static inefficiencies
present in the IP system.
 However, the IP system may still be more preferable
as it relies on decentralized market signals which act
as proxies for determining where to direct innovative
resources. “The market decides”

11. 2.2 Patterns of Productivity
 Without these market signals, decisions would need
to be made by a centralized player (e.g.,
Government) about where resources are to be
allocated. For the Govt to make an informed decision
for every inventive effort, it would need to collect and
analyse information – a very inefficient process
 Thus, the efficiency gains made by the IP system
through decentralized market forces dictating where
resources are to be allocated can outweigh the static
inefficiencies caused by it.

12. 2.2 Patterns of Productivity
 Policy questions therefore look only “internal” to IP
law.
 What should be the exceptions and limitations to IP
rights? How can one prevent the abuse of IP rights?
Etc
 Critique:
 Conflating concepts of “real property” and
“intellectual property” leads to harmful policy.

13. 2.2 Patterns of Productivity
 With ‘Real property’, private ownership avoids
‘tragedy of the commons’. Thus the property is made
use of more efficiently than it would otherwise be.
 With ‘intellectual property’, as discussed earlier,
private ownership rights are given despite being
inefficient.
 If IP is not being made use of optimally – then the
signals it makes on the market too may be distorted.
 The market is not necessarily the best determinant of
direction of allocation of inventive resources

14. 2.3 Racing issues
 The third major argument in the Economics of IP
framework revolves around reducing costs that arise
from duplicative research.
 When there is a large incentive, many parties are
incentivized into chasing it. However, the IP system,
as well as the prize system usually allow for only one
winner. This means even if the 2nd place party is only
1 day behind the 1st place party – their efforts go
completely unrewarded. This represents an
inefficient use of innovative resources

15. 3. Conclusion
 Looking at Economics of IP through a holistic lens,
there are three angles to consider:
 Incentive method – balancing incentives with inefficiencies so
as to achieve an optimal rate of innovation
 Diminishing distortions in how markets display consumer
needs, so as to appropriately direct inventive resources to their
most optimal usage in the presence of IP rights.
 Minimize rent dissipation caused by duplicative research.

16. 3. Conclusion
 (At least) Three broad conclusions that can be
drawn:
 Not clear that higher levels of IP leads to higher rate of
innovation
 Countries of different socio-economic statuses should
approach IP in ways appropriate to their domestic capabilities
 IP should be kept in the pot of larger socio-economic issues