The inclusion of patents makes the perm an open-ended innovation incentive
Buccafusco, Christopher and Weinstein, Samuel N. (2024) - Christopher Buccafusco is the Edward & Ellen Schwarzman Distinguished Professor at Duke University School of Law. Samuel N. Weinstein is a Professor and Co-Director of the Heyman Center on Corporate Governance at the Benjamin N. Cardozo School of Law, Yeshiva University "Antisocial Innovation," Georgia Law Review: Vol. 58: No. 2, Article 4. Available at: https://digitalcommons.law.uga.edu/glr/vol58/iss2/4
There are various solutions to the Box 4 problem that we have already discussed. Intellectual property rights give innovators exclusivity for a time where they can charge supracompetitive prices for access to their innovations, thereby recouping their investments.184 Prizes, grants, and tax incentives are other mechanisms to decrease or compensate for innovators’ costs to make the innovation privately valuable and worth pursuing.185 In effect, these incentives turn Box 4 innovations into Box 2 innovations.
Importantly, though, innovation incentives create two major risks. First, if they are awarded to innovators who already find themselves in Box 2, where they have sufficient private motivation to pursue the innovation, the incentives are unnecessary and socially costly. Giving patents to firms that would be willing to pursue inventions in the absence of exclusive rights simply drives up costs for consumers and competitors without generating any innovation benefits.186
Second, and more important from this article’s perspective, is the risk that we will give innovation incentives to Box 3 innovations and turn them into Box 1 innovations. That is to say, offering patents, prizes, grants, or tax incentives to negative private value-negative social value innovations that would not otherwise be pursued may make them sufficiently lucrative to be worth developing. Now, the innovation has positive private value, but it still has negative social value. For example, tobacco companies might not be willing to engage in the additional research and development to create a new menthol substitute on their own, but if the first company to develop one receives a lucrative patent, the calculus could change.
This is a serious problem and one that has not been explored in the literature previously. As the patent story goes, R&D is expensive, so, in the absence of supramarginal prices, innovators may not be willing to invest in new products. Patents tip those investments into the realm of cost-justified, and products get produced. But, again, the assumption is that the innovations are socially valuable. If they’re socially costly, however, the existence of a patent causes an otherwise undeveloped harm to arise. They become Box 1 innovations.