Using predictive decisionmaking to implement technology prizes
| DOI | https://doi.org/10.1108/JEPP-D-17-00004 |
| Date | 06 November 2017 |
| Published date | 06 November 2017 |
| Pages | 274-289 |
| Author | David Youngberg |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Using predictive decisionmaking
to implement technology prizes
David Youngberg
Department of Business and Economics, Montgomery College,
Rockville, Maryland, USA
Abstract
Purpose –The purpose of this paper is to propose a system for regularly offered government-sponsored
technology prizes. Such prizes would preserve the incentive to invent without the barriers toentry that come
with the patent system. This is of particular interest to entrepreneurs as they lack the patent portfolio that
incumbent firms can leverage into derivative technology.
Design/methodology/approach –After reviewing various efficiency concerns with the patent system,
the author describes how technology prizes could work alongside the patent system. Such prizes are best
when the sponsor can capture as much of the technology spillover as possible –i.e. through a government
agency. This paper provides a framework for a practical prize structure while paying special attention to
combating the logistical and public choice concerns of creating a prize.
Findings –This paper focuses on two methods to prevent inefficiency in government-sponsored prize:
truth-bonding and information markets. Each mechanism helps combat different kinds of problems.
Various complications to this system are explored and addressed.
Practical implications –The paper suggests that an efficient prize system is a possible policy and,
if implemented, would embolden technology-focused entrepreneurship and other subsequent technological
development.
Originality/value –While previous work has noted the benefits of technology prizes over patents, few
attempts have been made to outline an incentive-compatible system for doing so. This paper is thefirst of its
kind to propose a practical and efficient government-sponsored prize system.
Keywords Patents, Policy, Public choice, Intellectual property rights, Barriers to entry
Paper type Viewpoint
Patents exist to internalize the benefits of innovation, and thereby encourage research and
hasten technological development. If the cost to invent is higher than the invention’s private
benefits but lower than its public benefits, the number of inventions would be suboptimal
without patents. Just as people underutilize collectivist farms until property rights are
established, inventors would allow fertile ideas to lay fallow unless properly incentivized.
Patents are property rights over ideas (Hunter, 2012). In theory, they align incentives with
efficiency by connecting inventor rewards to consumer value. Market participants’
information advantage concerning economic conditions and their own abilities also render
patents preferred to government-directed research (De Laat, 1996; Shavell and Van Ypersele,
2001; Gallini and Scotchmer, 2002).
But the incentive-aligned awardscome at the cost of deadweightloss. A technology prize –
a one-time cash payout for any participant who invents an answer to a specific problem in
exchange for forgoing patenting rights –could solve the internalization of benefits problem
without the deadweight loss of monopoly. The cash payout would have to align with the
winning invention’s positive social value and prize size is crucial: smallprizes will not attract
enough investmentand large ones will attract too much (Galliniand Scotchmer, 2002). But the
nonmarket orientation of setting a prize’s size and other parametersendangers the efficiency
gains from augmenting the patent system with a technology prize, even if such a prize could
potentially be welfare-enhancing (Wright, 1983; Shavell and Van Ypersele, 2001).
This paper proposes a government agency with a similar structure to the United States’
National Science Foundation (NSF) to run a series of government-sponsored prizes.
Whereas the NSF evaluates and offers grant proposals, this agency would approve and
Journal of Entrepreneurship and
Public Policy
Vol. 6 No. 3, 2017
pp. 274-289
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-17-00004
Received 31 May 2017
Revised 9 August 2017
Accepted 11 August 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
274
JEPP
6,3
administer prizes. Such an addition would exist independent of and parallel to the patent
system and brings up questions of how to avoid rent-seeking as well as the aforementioned
nonmarket orientation problem. Maintaining efficient incentives are accomplished with
truth-bonding and the utilization of prediction markets.
The patent system
A patent is a legal monopoly over an invention. To qualify for a patent, an invention must be
novel, non-obvious, and have utility. Novelty means something new (one cannot patent
something that is trivially the same as something else already invented), non-obvious means
the invention would not be evident to a person with “ordinary skill in the art,”and utility
means that there is a use for the invention (ruling out perpetual motion machines which,
by the laws of nature, cannot work).
Firms patent to secure intellectual property. In exchange for full public disclosure, the
firm gains a monopoly to the invention which, by paying the patent office renewal fees, lasts
20 years (though various legal actions can be taken to extend that period). Even though
competitors cannot invent, copy, or use a technology due to infringement laws, they will be
allowed to do so when the patent runs out. In theory, this disclosure enhances technological
diffusion. By making the details of an invention open to the public, other inventors can
easily build-off of that technology.
The legal and bureaucratic systems have evolved a series of mechanisms to decrease
unintended side effects. The patent process and the court appeals are the most obvious
institutions. The United States Patent and Trademark Office (USPTO) approves or denies
patent applications based on a review of established patents. Attempts for the USPTO to
abuse its power, either by being too loose or too stringent with issuing patents, are met with
the applicant or a patent holder’s competitor appealing the decision to the United States
Court of Appeals for the Federal Circuit. Since it is in each agency’s interest to maintain
relevancy and independence, each agency will avoid egregious abuses on their part in the
patent process lest the other party –or a third party, such as Congress –strips them of
their power (Ferejohn and Shipan, 1990). In addition to correcting USPTO errors in their
acceptance or rejection of a patent, the doctrine of equivalents increases the scope of the
patent beyond its original boundaries to avoid duplicate patents with trivial differences
(Hunter, 2012).
Assignees must pay renewal fees 3.5, 7.5, and 11.5 years after the patent was
issued to keep it active (called first, second, and third stage, respectively). While renewal
fees are relatively small (as of 2016 the standard fees are $1,600, $3,600, and $7,400,
respectively), they are large enough to purge many patents from the books (United States
Patent and Trademark Office, 2017a). In 2016, 85.5 percent of first stage patents
were renewed, 66.4 percent of second stage patents were renewed, and 47.0 percent of
third stage patents were renewed (United States Patent and Trademark Office, 2017b).
These fees encourage the premature termination of patents with low social value
(Scotchmer, 1999).
Patent criticisms
Despite these measures, economists have long noted the flaws in the modern patent system.
The inefficiencies stem from the nature of cumulative innovation: ideas are built on previous
ideas. There are spillovers –positive externalities –to technological development.
The patent system hampers this process by allowing exclusive use of key innovations
(Boldrin and David, 2002, 2013). If several firms hold patents which, collectively, are
necessary for a new invention, the transaction costs involved in licensing with each firm can
deter the development of that new invention. Navigating the “patent thicket”hampers
innovative efforts and may terminate them altogether. The most extreme result is the
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prizes
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