Innovators would either shift to trade secrets or stop innovating altogether

Abramowicz, elucidating Shavell and Ypersele, distinguishes mandatory and optional prize systems. In a mandatory prize system, the patentee would be required to accept the prize; there would be no option to exploit the patent in the market. To be sure, trade secrecy would be available as an alternative to the prize, but not all innovations can be protected through trade secrecy. The risk of confiscation is obvious under the mandatory prize. If the patentee must sell the patent to the government in exchange for the prize, then the government, as a rational actor, will eventually reduce the value of the prize. Foreseeing this outcome, the innovator’s incentive to innovate would be weakened, and less capital would be available to support innovation.