The stationary bandit model of intellectual property.

Author:Davidson, Sinclair

We propose a new model of intellectual property that presents a different view than the market failure/monopoly rent model advanced by Arrow (1962), in which governments protect inventors from private theft. Instead, using Olson (1993), we represent a public theft model of intellectual property arising when entrepreneurs acting in global markets seek protection from a stationary bandit (their home government) principally against the depredations of other governments (the roving bandits). This model explains why institutional quality matters to the global location of R&D intensive industries, such as biopharma, and why so much intellectual property is located in tax havens.

Government, Citizens, and Intellectual Property

The first duty of government is to protect its citizens. Put the other way, the value to a citizen of a strong government is to protect their life, liberty, and property from the depredations of others. In the political romantic view, this is the protection of the weak by the strong. But the real nature of the bargain is that the weak must then pay tribute to the strong. In his antisocial contract model of the origin of government, Mancur Olson (1993) argued that governments offering protection are essentially "roving bandits" who have settled down to establish a monopoly on theft as "stationary bandits" who protect their tributes--now called tax-paying citizens--from external threats. Stationary bandits still plunder their captives to the maximum extent, but they do so rationally, leaving them sufficient resources and furnishing peaceful order and public goods to maximize the future stream of taxes.

In using the stationary bandit model of government, (1) we argue that new ideas--of the sort that become patents, copyrights, and trademarks--emerge as economic rights, (2) born global into a world of roving bandits. The holders of those rights seek protection from a stationary bandit who extracts tribute in return. The key insight of our model, however, is a sharper distinction of who those bandits are. In the standard model of intellectual property, benevolent national governments grant a temporary monopoly privilege to protect the creative inventor citizen from the unscrupulous depredations of private competitors or even consumers. The argument goes that without a legislative prohibition on copying (institutionally defined as theft), a competitive market will provide only weak incentives to invest in creating new ideas--that is, there will be market failure (Arrow 1962), and society will suffer a suboptimal level of creative-inventive activity (Posner 2005). In the standard model, government protects holders of intellectual property from private theft, making the nation safe for private creativity.

Now private theft is certainly a problem, but we maintain that public theft is much worse. The main predators on intellectual property, we argue, are not private competitors (e.g., copying a technology) or individual consumers (e.g., illegal downloads), but other governments through their client services and cronies, who variously engage in outright theft or coercive measures to diminish and deplete the value of their intellectual property (Ezell, Nager, and Atkinson 2016). A common example is the treatment of biopharma, routinely subject to outright theft, compulsory licensing, and other practices that diminish its value (Wu and Ezell 2016). In our new model, vulnerable subjects seek protection for their private economic property from the banditry of other governments, by registering their property with a strong government whom they trust to be powerful enough to protect it as they peacefully engage in trade and commerce throughout the world. The origin of intellectual property is when one of these roving bandits finds it worthwhile to become a stationary bandit by protecting the idea (the entrepreneurial discovery and the economic asset) from organized theft by other governments and settling down as a monopoly exploiter.

This sort of public action on behalf of private citizens should not be confused with rent seeking or cronyism, where agents seek private benefit from insider markets to public power. This is important, because the standard model of intellectual property is in effect a benevolent form of rent creation--in which the private citizen is incentivized to produce novelty and make it public, in return for a government-granted monopoly--thus creating a mechanism to transfer resources from other agents in the economy to the target. But in our model of intellectual property, when private agents seek protection, they are not seeking to exploit insider political markets or to transfer resources from other groups of citizens (Olson 1965), but rather to have their economic property rights represented and protected as they venture through the world seeking to trade. (3) In return, they grant that protector government an exclusive right to exploit them through perpetual taxation of the property. The other side of the intellectual property is not market failure and the creation of a monopoly form of intellectual property right, as Arrow (1962) claimed, but rather market making in return for a monopoly on taxation.

A better model of this exchange is gunboat diplomacy. Governments have long used force to open markets when acting as agents on behalf of their merchant citizens seeking to extend their property rights and opportunities for exchange and commerce into new territories. (4) Widely misrepresented as imperialist venturing, implying a political empire-building motive, these actions are better understood as venturesome tax policy, because the public displays of force--through the posturing of naval assets, say--are on behalf of those over whom the government has monopoly tax rights and therefore a vested interest in their market success. The origin and nature of intellectual property rights can be similarly construed.

The Market Failure Model of Intellectual Property

In the standard account, the economics of intellectual property is a two-sided ledger, balancing the benefit of an investment incentive against the cost of a monopoly. When economists argue for or against, or for stronger or weaker intellectual property, they are arguing about the relative size of the entries in this ledger. The prime argument that the benefit exceeds the cost is that of market failure in the production of information owing to a fixed cost (e.g., R&D) that is unrecoverable under perfect competition (Arrow 1962). The opposite argument is that there is no such market failure and that innovation is possible under perfect competition, and so the* benefit can be obtained without paying the monopoly cost (Boldrin and Levine 2008, 2013). Dourado and Tabarrok (2015) show how the rent-seeking costs of the monopoly at some margins will be greater than the public benefit. The existence of such a tradeoff implies an optimal size and duration of that government-created rent (Nordhaus 1969, Gilbert and Shapiro 1990, Romer 2002, Landes and Posner 2003), including the prospect that private or informal institutions may be more efficient (Hall et al. 2014), or that more efficient mechanisms might be designed (Wright 1983, Kremer 1998) or could evolve (Ostrom and Hess 2006, Benkler 2006).

In the market failure model of intellectual property, economic efficiency requires government support for private creative and innovative activity (Arrow 1962, Scotchmer 2004). Two premises are baked into this argument. The first is that intellectual property--patents, copyrights, trademarks, as well as industrial design rights, trade dress, plant varieties, and trade secrets--is a government-granted monopoly. This can certainly be read in the history of intellectual property, which grew out of royal grants and privileges, with patents from the Statute of Monopolies (1624) and copyright from the Statute of Anne (1710). The property right exists because the government grants a temporary monopoly to create an incentive for the private production of new ideas, information, and technology. The second premise is that the natural domain of the artificially created property right, as a monopoly on trade, is therefore identical to the domain of the government that granted it. The market failure model of intellectual property is told from the perspective of a large nation state. While rarely stated in this way, this is a social contract view of intellectual property in which governments act on behalf of the collective will of the people, who benefit overall from having such an incentive within their civil jurisdiction and are willing to grant special privileges to those among them who furnish what will eventually become public goods (Nordhaus 1969). (5) This is a model of intellectual property in which government is a benevolent agent acting to maximize social value for its citizens by dispensing temporary rents. Overall, most thinking about intellectual property is grounded in the idea that it is a legal property right granted by a nation-state rather than an economic right with global expression.

The Stationary Bandit Model of Intellectual Property

The stationary bandit model of government (Olson 1993, 1995; McGuire and Olson 1996) is an anti-social-contract (6) theory approach. A stationary bandit is a roving bandit who settles down to monopolize theft over his subjects at a given rate of tax, which is preferable to roving bandits who steal everything. The model arises from the combination of a domain of "encompassing interest" (Olson 1982) interacting with the private value of peace, order and public goods, including protection (Olson 1993).

In our alternative model, it is not the government that grants the monopoly right to the...

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