Incomplete contracts, intellectual property rights, and incentives: Investment in knowledge assets under alternative institutional configurations

Knowledge is a unique asset that almost satisfies the premises of a public good. It is difficult to exclude others from using knowledge. Moreover, there is no depletion in use; it is a non-rival asset. The public good approach puts emphasis on the appropriation problem, that there would be insufficient incentives to produce knowledge due to temptation to free-ride on others’ contributions. This situation describes a Prisoner’s Dilemma game. The intellectual property rights system (IPR), allegedly, alleviates this problem. An alternative approach points out another feature of knowledge. It is a non-existing resource; hence the fundamental difficulty is its creation. Knowledge creation requires collaboration and coordination and yet, it is also sequential and cumulative. Cooperation under IPR may not be automatic due to conflict over dividing the gains between agents who already own IPR and others who do not. In the chapter, we discuss the premises and implications of alternative institutional configurations.