Enterprise and incentives for innovation.

• Author: Khan, B.Zorina

All societies have an interest in finding the appropriate incentives and institutions to promote enterprise, knowledge, and innovation. My empirical research in law and economic history sheds light on these sources of long-term development in Europe and the United States during early industrialization, 1750-1930. This was a period of enormous policy variation, which allows us to better identify the nature and consequences of specific measures.

Patents and Inventive Activity

My first book, The Democratization of Invention, empirically examined the genesis and consequences of intellectual property policy in the 19th century. (1) European institutions inhibited access owing to their assumption that elites engendered technological and economic progress. The U.S. deliberately departed from precedent to introduce the world's first modern patent system, which, along with effective legal enforcement, facilitated rapid technological progress. (2) The evidence indicates how responsive all inventors--women, ordinary artisans, scientists, even economists--were to expected returns and to enforceable property rights. This was the age of patented invention; Kenneth Sokoloff and I found that the propensity to patent was especially high among the "great inventors." (3) The majority of productive inventors came from relatively undistinguished backgrounds, and even in Britain individuals with modest education, rather than scientific elites, created the important advances. (4)

The American Civil War was an exogenous shock that helps to identify the responsiveness of inventors and inventions at the most granular level. (5) This conflict marked the advent of technology-intensive warfare, and key military participants as well as the U.S. president were patentees. I traced the lifetime patenting careers of a random sample of inventors, and estimated whether the creators of war-related technologies were first-time inventors, had previously created military inventions, or switched from unrelated inventions. The results indicated that both the rate and direction of inventiveness altered with war-time variation in expected benefits. (6) For instance, improvements in prosthetics increased during the war and declined at its conclusion, then rebounded after Congress undertook, in 1870, to continue to underwrite the costs of artificial limbs for veterans [Figure 1].

One of the fundamental features of the American patent system was its role in facilitating markets in technology and the mobilization of venture capital. Naomi Lamoreaux and Sokoloff showed how trade in patents promoted a specialization and division of labor among inventors, who were able to leverage their inventive ability to obtain funding. (7) Endogenous trade in markets was favorably influenced by American patent rules, notably the centralized examination system, which filtered applications for novelty and provided a signal of technical merit. (8) U.S. knowledge markets were much more extensive relative to their international competitors, and the ability to trade secure inventive assets was especially significant for disadvantaged inventors who did not possess the means or connections to appropriate returns from manufacturing enterprises. (9)

Innovation Prizes

Economists who model innovation incentives often reference historical "facts" like the prizes for longitude and the Daguerreotype "patent buyout." However, examination of original archival records reveals inaccuracies that undermine central claims of their theories. (10) Daguerre, for instance, never obtained a French patent and, instead, lobbied for and gained government payouts in a classic example of rent-seeking. My research provides systematic empirical evidence regarding how innovation prizes work in practice, the political economy of these administered incentives, and potential deadweight losses from associated inefficiencies.

The most creative identification strategies are only as good as the underlying data and, as economic historians stress, effective economic inquiry requires meticulous attention to institutional details and context. To avoid biases associated with any one source, my analysis triangulates by employing extensive datasets with detailed information on inventors, inventions, and institutions from the United States and Europe.

The renowned Royal Society of Arts (RSA) in London provides a valuable opportunity to investigate the efficiency of ex ante inducement--prizes as incentives for invention. (11) The society initially was averse to patents and prohibited the award of prizes for patented inventions, so the two mechanisms were substitutes rather than complements. My dataset encompasses several thousand monetary and honorary prizes, patent records, and detailed archival information about the application and decision-making process. Committees were typically unable to identify or induce worthwhile inventions...