Patents discourage follow-on innovation – overwhelming empirical data

As discussed in Section 2, a key aspect of the patent system is the requirement that firms must disclose their invention, which in principal disseminates the scientific knowledge underlying the patented technology. However, a question remains of whether the patenting of a given technology nonetheless discourages cumulative innovation, in the sense of subsequent innovation building on the initial (patented) technology. Although the effects of IPR on subsequent innovation are ambiguous from a theoretical perspective, recent empirical evidence consistently suggests that on net IPR discourages subsequent innovation (Murray et al. 2009, Murray and Stern 2007, Williams 2010). This empirical evidence raises the idea that one useful context for prize mechanisms may be to reward innovations where IPR may be expected to substantively distort cumulative innovation.

It is worth first reviewing the empirical evidence suggesting that IPR can distort cumulative innovation, at least in some contexts. It is difficult to estimate the effects of intellectual property on subsequent innovation, largely because technologies that are held with IPR in most cases will be inherently different than technologies that are in the public domain. For example, Moser (2007) finds evidence that higher quality innovations are more likely to be patented. Such patterns of selection into IPR complicate simple comparisons of the levels of subsequent R&D on – say – patented and nonpatented technologies, since the levels of subsequent R&D may reflect both any effects of IPR on subsequent innovation, and the “selection effect” of which technologies are patented in the first place.

A number of recent papers have attempted to circumvent such selection issues in order to isolate the effect of IPR on subsequent innovation. Murray and Stern (2007) use data on life sciences technologies, and find that patent grants decrease citations to scientific papers on the patented technology, relative to scientific papers on similar non-patented technologies. Murray et al. (2009) find that the removal of IPR restrictions on certain types of genetically engineered mice increased citations to scientific papers on affected mice relative to scientific papers on unaffected mice. Murray et al. (2009) also find evidence, consistent with the model of Aghion, Dewatripont, and Stein (2008), that IPR reduces the diversity of scientific experimentation. Finally, in previous work (Williams 2010) I found evidence that non-patent contract-law-based IPR on sequenced human genes appears to have discouraged both subsequent scientific research (in terms of gains in knowledge about the functions genes have within the human body) and subsequent product development (in terms of the use of sequenced genes in genetic diagnostic tests that are available to consumers).

To summarize, although the effects of IPR on cumulative innovation are ambiguous from a theoretical perspective, the body of available empirical evidence suggests that IPR substantively hinders both subsequent scientific research and subsequent product development. Across a relatively heterogeneous set of technologies within the life sciences, and examining various forms of IPR, the available empirical evidence suggests that IPR hinders cumulative innovation – with declines on the order of 30 percent. Clearly much more work is needed in order to examine the extent to which these patterns generalize to other markets and other forms of IPR, but the best available evidence suggests that mechanisms that reward innovation in a way that places the technologies in the public domain may have substantial benefits in terms of encouraging cumulative innovation.