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Rewarding sequential innovators: prizes, patents and buyouts

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  • Hugo A. Hopenhayn
  • Gerard Llobet
  • Matthew F. Mitchell

Abstract

This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract.

Suggested Citation

  • Hugo A. Hopenhayn & Gerard Llobet & Matthew F. Mitchell, . "Rewarding sequential innovators: prizes, patents and buyouts," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:273
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    References listed on IDEAS

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    Cited by:

    1. Carl Shapiro, 2008. "Patent Reform: Aligning Reward and Contribution," NBER Chapters, in: Innovation Policy and the Economy, Volume 8, pages 111-156, National Bureau of Economic Research, Inc.
    2. Sergei Guriev & Dmitriy Kvasov, 2005. "Contracting on Time," American Economic Review, American Economic Association, vol. 95(5), pages 1369-1385, December.
    3. Gerard Llobet & Javier Suarez, 2010. "Entrepreneurial Innovation, Patent Protection and Industry Dynamics," Working Papers wp2010_1001, CEMFI.
    4. Cosnita, Andreea & Tropeano, Jean-Philippe, 2009. "Negotiating remedies: Revealing the merger efficiency gains," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 188-196, March.
    5. Stan J. Liebowitz & Richard Watt, 2006. "How To Best Ensure Remuneration For Creators In The Market For Music? Copyright And Its Alternatives," Journal of Economic Surveys, Wiley Blackwell, vol. 20(4), pages 513-545, September.
    6. Angus Chu, 2009. "Effects of blocking patents on R&D: a quantitative DGE analysis," Journal of Economic Growth, Springer, vol. 14(1), pages 55-78, March.
    7. Alexandre Almeida & Aurora A.C. Teixeira, 2007. "Does Patenting negatively impact on R&D investment?An international panel data assessment," FEP Working Papers 255, Universidade do Porto, Faculdade de Economia do Porto.
    8. Ilya Segal & Michael D. Whinston, 2007. "Antitrust in Innovative Industries," American Economic Review, American Economic Association, vol. 97(5), pages 1703-1730, December.
    9. Ufuk Akcigit & William R. Kerr, 2018. "Growth through Heterogeneous Innovations," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1374-1443.
    10. Encaoua, David & Guellec, Dominique & Martinez, Catalina, 2006. "Patent systems for encouraging innovation: Lessons from economic analysis," Research Policy, Elsevier, vol. 35(9), pages 1423-1440, November.
    11. Denicolo, Vincenzo & Zanchettin, Piercarlo, 2002. "How should forward patent protection be provided?," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 801-827, June.
    12. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April.
    13. Daron Acemoglu & Ufuk Akcigit, 2006. "State-Dependent Intellectual Property Rights Policy," NBER Working Papers 12775, National Bureau of Economic Research, Inc.
    14. Fernando Leiva B., 2006. "Pricing Patents through Citations," 2006 Meeting Papers 834, Society for Economic Dynamics.
    15. repec:hal:spmain:info:hdl:2441/4et5cqo2b89lursqp7n50mt26c is not listed on IDEAS

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