Innovation Policy Pluralism.

Author:Hemel, Daniel J.

ARTICLE CONTENTS INTRODUCTION 547 I. INCENTIVIZING INNOVATION: PATENTS VS. PRIZES VS. GRANTS VS. TAX PREFERENCES 551 II. OPTIMIZING OUTCOMES: MATCHING, MIXING, AND LAYERING INNOVATION POLICIES 558 A. Incentivizing Innovation vs. Allocating Access 559 B. Matching Incentives with Allocation Mechanisms 563 1. Matching IP Innovation Incentives with Non-IP Allocation Mechanisms 563 2. Matching Non-IP Innovation Incentives with IP-Based Allocation Mechanisms 566 C. Mixing IP and Non-IP Tools 573 1. Mixing on the Innovation-Incentive Side 574 a. Reward Setting 574 b. Reward Timing 581 2. Mixing on the Allocation Side 584 D. Layering IP and Non-IP Systems 588 III. INNOVATION POLICY PLURALISM IN PRACTICE: THE CASE OF PHARMACEUTICALS 593 A. Matching in Practice 594 B. Mixing in Practice 596 C. Layering in Practice 599 IV. MATCHING, MIXING, AND LAYERING BEYOND PATENTS 601 A. IP Beyond Patents 601 B. Matching, Mixing, and Layering Beyond IP 609 CONCLUSION 612 INTRODUCTION

What is intellectual property (IP)? From the innovator's perspective, it is a set of rules that rewards producers of knowledge goods with temporary exclusive rights to their creations. From the consumer's perspective, it is a set of rules that makes access to knowledge goods conditional upon the payment of a price above the marginal cost of those goods. Both characterizations are accurate. But they describe two very different elements of intellectual property. Contrary to the conventional characterization of IP as monolithic, these elements need not travel together.

Imagine, for example, a world in which producers of knowledge goods are rewarded with patents, but the government then buys those IP rights from producers for fair market value and makes access to knowledge goods free. From the innovator's perspective, this system still looks a lot like intellectual property, as the innovator receives a market-based reward at the end of the creative process. From the consumer's perspective, however, this world could not look any more different from IP--rather than paying a proprietary price for access to knowledge goods, the consumer can gain access at no cost.

Now imagine an alternative world in which knowledge goods are produced in government laboratories by public employees, but the government then claims a patent on the resulting knowledge goods and behaves like a monopolist in the market. From the perspective of the innovator (the government employee), this world looks nothing like IP: she is paid a fixed salary regardless of her output, and her laboratory's funding does not depend on the success of her projects or on market assessments of their value. From the perspective of the consumer, however, this world looks almost exactly like IP. The only difference is that the entity to which the consumer pays a proprietary price is the government rather than a private firm.

The point can also be made in more general terms. From the perspective of the inventor or creator, IP is an innovation incentive--it establishes the pay-of structure for producers of knowledge goods. From the perspective of consumers, including both end users and those who use knowledge goods as an input to subsequent creation, IP is an allocation mechanism--it establishes the terms under which individuals and firms can gain access to knowledge goods. But these are not simply two different perspectives on the same policy. IP's innovation incentive and its allocation mechanism are distinct.

Distinguishing between IP as an innovation incentive and IP as an allocation mechanism clarifies ongoing debates in innovation law and policy. Consider the claim that IP's monetary payofffs "crowd out" other motivations that might lead researchers to pursue the projects with the highest social value, such as basic research efforts that lack immediate commercial applications. (1) This is a criticism of IP as an innovation incentive, not a criticism of it as an allocation mechanism. We can imagine a scenario in which government researchers receive a fixed salary regardless of which projects they pursue--thus reducing their vulnerability to the "crowding out" effect of IP--while the government still claims patents on the resulting inventions and behaves like a monopolist in the product market. Alternatively, consider the argument that IP leads to allocative inefficiencies because monopolists set prices above marginal cost, resulting in deadweight loss that affects both end-users and cumulative innovators. (2) This is a criticism of IP as an allocation mechanism, not a criticism of IP as an innovation incentive. We can imagine a scenario in which the government makes knowledge goods available to all on an open-access basis--and so avoids the deadweight loss problem-while purchasing patents from inventors for the expected net present value of the future patent profits. Such a system would be vulnerable to the "crowding out" objection, but not the allocative inefficiency objection.

Just as specific criticisms of IP tend to be directed at either the incentive element or the allocation element but not both, the virtues of IP tend to be particular to one element or the other. Consider the claim that IP is superior to government-set rewards such as prizes and grants because it leverages private information from market actors to establish payofffs. (3) This is a defense of IP as an innovation incentive, with only partial applicability to IP as an allocation mechanism. We can imagine a "patent buyout" scheme in which payofffs for innovators are set through an auction that leverages private information from market actors, while at the same time patented products are available to consumers on an open-access basis. The informational benefit of a market-set reward gives us a reason to adopt IP as an innovation incentive, but it does not necessarily weigh in favor of IP as an allocation mechanism. Alternatively, consider the claim that IP is superior to other innovation policies with respect to luxury goods because it embodies a normatively attractive user-pays principle. (4) This is a defense of IP as an allocation mechanism, but it tells us very little about how innovation incentives should be structured.

The incentive/allocation distinction not only clarifies current IP debates, but also opens up new possibilities for innovation policy. The recognition that we can use IP as an innovation incentive while allocating knowledge goods on an open-access basis prompts the question: where and why might we choose to do so? Further, once one realizes that IP innovation incentives can be combined productively with non-IP allocation mechanisms (and vice versa), it is a natural next step to consider whether and when we might choose to combine IP and non-IP mechanisms on the same side of the innovation/allocation divide. Here too, we can identify a wide range of circumstances in which IP/non-IP combinations can advance the goals of innovation law.

The combinatorial possibilities become even richer when we consider that domestic innovation policies exist in a globalized world, beneath a layer of international IP law. The international IP framework, we argue, functions as a mechanism for allocating the costs of innovation across countries, but it does not dictate the choice of innovation policies within countries. States can adopt their own non-IP innovation incentives and their own non-IP allocation mechanisms while remaining in compliance with their obligations under international IP treaties. And even if international law were to shiftt away from its current IP orientation, states might choose to use IP tools in order to incentivize innovation and allocate knowledge goods domestically. Domestic and international knowledge-good regimes are, we argue, largely separable both in theory and in practice.

While the examples above call on readers to engage in imaginative exercises, the claims of this Article are not exclusively theoretical. We argue that "pluralism"--as defined by the combination of IP and non-IP policies, or different types of non-IP policies--provides a more descriptively accurate account of the innovation policy landscape than those that dominate the existing literature. In other words, we can do more than imagine the possibility of combining IP and non-IP innovation incentives and allocation mechanisms in the ways described above. We can observe a wide range of real-world examples in which such combinations are already in use. But these real-world combinations appear to have arisen by happenstance rather than design, and proposals for further reform would benefit from more careful consideration of IP's distinct elements.

Our overarching objective is to set out a framework for the study of pluralistic innovation policy arrangements that can organize and motivate further research across subfields. In so doing, we introduce a new vocabulary for characterizing and comparing IP/non-IP combinations. First, as previewed above, we define and distinguish innovation incentives, which establish the payofff structure for producers of knowledge goods, and allocation mechanisms, which establish the conditions under which consumers can use knowledge goods. We then describe the three ways that IP and non-IP innovation incentives and allocation mechanisms can be combined. Matching involves the pairing of an IP innovation incentive with a non-IP allocation mechanism or vice versa, the pairing of a non-IP innovation incentive with IP as an allocation strategy. Mixing involves the combination of IP and non-IP innovation incentives, or IP and non-IP allocation mechanisms--that is, IP and non-IP tools are used on the same side of the incentive/allocation divide. Finally, layering refers to the use of different policies at different jurisdictional levels, such as using non-IP innovation incentives and allocation mechanisms at the domestic level within an international legal system oriented around IP. Theoretically, layering...

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