PROCURING KNOWLEDGE

• Date: 27 April 2004
• Pages: 1-31
• DOI: https://doi.org/10.1016/S1048-4736(04)01501-2
• Published date: 27 April 2004
• Author: Stephen M Maurer,Suzanne Scotchmer

PROCURING KNOWLEDGE

Stephen M. Maurer and Suzanne Scotchmer

ABSTRACT

There is growing public interest in alternatives to intellectual property in-

cluding, but not limited to, prizes and government grants. We collect various

historical and contemporary examples of alternative incentives, and show

when they are superior to intellectual property. We also give an explana-

tion for why federally funded R&D has moved from an intramural activity to

largely a grant process. Finally, we observe that much research is supported

by a hybrid system of public and private sponsorship, and explain why this

makes sense in some circumstances.

1. INTRODUCTION

Patents and other intellectual property rights (IPRs) became stronger during the

1980s and 1990s than at any point in the preceding century. Nevertheless, other

mechanisms for eliciting and investing in new ideas have remained important.

This is particularly true in the public sector, where federal spending accounts

for almost a third of the nation’s total R&D. (The fraction is higher in most

other countries.) Funding mechanisms used by the public sector routinely include

in-house development, procurement through competitive bidding, and research

grants to universities and promising scientists.

The public sector also uses hybrids that mix sponsorship with intellectual prop-

erty. The 1980 Bayh-Dole and Stevenson-Wydler Acts authorized the patenting

and licensing of federally funded research outputs, and the Federal Technology

Intellectual Property and Entrepreneurship

Advances in the Study of Entrepreneurship, Innovation and Economic Growth,

Volume15, 1–31

© 2004 Published by Elsevier Ltd.

ISSN: 1048-4736/doi:10.1016/S1048-4736(04)01501-2

1

2 STEPHEN M. MAURER AND SUZANNE SCOTCHMER

Transfer Act of 1986 authorized the formation of Cooperative Research and

Development Agreements (CRADA’s)between national laboratories and industry,

granting intellectual property to the industrial partners.

Despite the prominence of intellectual property incentives, prize-based and

other incentives remain strong, and may even be undergoing a renaissance.

Beginning in the Clinton Administration, NASA and Congress have debated

a prize-based approach to new space technology (Space Projects, 2003). The

Defense Advanced Research Projects Agency (DARPA) has offered a $1

million prize designed to elict a 40-fold improvement in robotic off-road vehicle

design (DARPA, 2003; Holden, 2003). Even the private sector has begun to

experiment with prizes, and in at least one offering, the prize mechanism has

become institutionalized. Eli Lilly Corporation has established a company called

Innocentive to elicit new ideas for solving problems in biology, chemistry,

biochemistry, and materials science. “Seeker companies” post problems on Inno-

centive’s web site and offer rewards ranging from $5,000 to $100,000. Scientists

are invited to submit solutions, and the seeker companies pick the best ones

(Innocentive, 2003).

In this paper we catalog some of the many incentive schemes that have been

suggested and used. We argue that the sensibleness of each scheme – indeed, the

attractiveness of intellectual property – cannot be debated without reference to a

specific environment of knowledgecreation. The diversity of models and incentive

schemes discussed here suggest that no single incentive mechanism dominates, but

that different models of knowledge creation call for different incentive schemes.

There are also creative environments where the social value of an innovation is

not appropriable by private firms or intellectual property rights are insufficient to

cover costs.1

The main objective of the incentive schemes we discuss is to elicit investments

in new knowledge. Another objective is to do this at the lowest possible cost.

The cost of investing in knowledge has two components: resource costs and the

diminution of value that may arise through proprietary pricing and deadweight

loss. The latter particularly afflicts intellectual property. Although raising funds

for general revenue is not costless, the associated inefficienciesare usually thought

to be less onerous than taxing a single market, as proprietary pricing does. This

observation leads to the conjecture that, in many creative environments, some

form of public procurement may be preferred.

We beginin Section 2 with a model of the creative process, and then discuss the

incentive mechanisms that naturally flow from it. The efficacy of prize systems,

discussed in Section 3, will depend largely on whether prizes can be made to

reflect the values of delivered innovations. But even if that is possible, prize

incentives, like patent incentives, are a crude mechanism for discriminating