Stronger IP laws lead to a decrease in innovation

This paper contributes to the debate on the role of intellectual property rights by means of a laboratory experiment. We recreate in the laboratory a sequential innovation environment, and use a word-creation task that combines the central features of innovation, investment and creativity, in one experiment. We use this task to investigate the effects of the presence or absence of intellectual property rights on innovation activity and welfare. We further assess the effect of communication with and without IP. Results clearly show that the introduction of intellectual property hinders innovation. In presence of IP the economy produces less valuable innovations, and welfare decreases. Introducing IP causes a shift towards more basic innovations and a higher degree of autarky – i.e., relying on the self-produced prior innovations rather than building on the best available opportunity within the economy at large. Conversely, the absence of IP results in more sophisticated and more valuable innovations and provides incentives to stand on the shoulders of giants, opening up more profitable innovation paths. Moreover, the negative effects of IP are not a short term phenomenon, but rather worsen over time as license fees tend to increase, leading to the breakdown of cooperative efforts and the use of autarkic strategies.