Putting the invention into public domain immediately is bad – it weakens follow-on innovation

Prize proposals offer the benefit of putting inventions into the public domain as soon as possible. However, there is little consideration in the prize literature to the costs of putting inventions into the public domain at an early date.

Prize proposals go directly against Kitch’s (1977) prospect thesis, that the patent enables the patentee to coordinate further development of the invention. Kitch argues that it is only after the patent has been granted that the patentee is able to work with others who have complementary skills in order to optimize the social surplus from the patent. The patent right serves as an enclosure of the public domain, which would otherwise be mismanaged. In the absence of such a right to control development, which would be observed if the patent right were interpreted narrowly, multiple individuals would enter and attempt to take control of the path of the innovation. Knowing that this splintering would likely occur, the initial inventor would have weak incentives to develop the idea and weaker incentives, relative to the patent regime, to innovate in the first place.

Obviously, patents would not be able to serve this prospecting function in a prize regime. They would go into the public domain immediately. Once in the public domain, the incentives to invest resources in order to further develop the idea would be weak. The additional innovation would be copied immediately – unless it could be protected by secrecy or some other obstacle that would impede rapid copying. The problem with the public domain is there is no point at which, once crossing into the public domain, the innovator is able to make further investments with the aim of recouping them. And since many inventors probably believe that they have even smarter competitors, many would realize that once they had been awarded the prize, the likelihood is substantial that someone else would improve the technology and wind up earning the greatest short-run profit from it. This would tend to impede innovation.

In order to minimize the risk of having one’s efforts appropriated by a later innovator, the first innovator would seek to delay the application for the prize until the innovation had reached a stage where its value is substantial. This would result in longer periods of investment than under the patent system. In contrast to the prize system, the patent system permits innovators to rush to the patent office and stake a claim which can profitably be developed, as long as the patent is interpreted in a sufficiently broad manner.