Chapter 1 Institutions 2013

TheEconomicsofInnovation
Prof.Dr.UlrichKaiser Departmentof BusinessAdministration Universityof Zurich
Springsemester 2013
Universityof Zurich
Departmentof BusinessAdministration UlrichKaiser
Springsemester2013
Abriefhistory yofinstitutions
Whatdoweneedtogenerateinnovationsandcreativeworks? (i) Thewill. (ii) Themeans. Weneedincentives top provideboth!
Universityof Zurich
Springsemester2013
Research,likeart,needsconcentratedresources. Mostimportantmeansforconcentrations: (i)taxation (ii) ( )appropriate pp p benefitsofinnovation (iii)privatewealth.
Universityof Zurich
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Wealsoneedinstitutions thatsupportinnovations: (i)Governments (ii)Firms (iii) ( )Privatep patrons (iv)Foundations.
Universityof Zurich
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Twotypesofinvention: (i)institutions (ii)innovationsthemselves. Subsistenceconservatism:inability ytoconcentrateresources/appropriate / pp p benefits
Example:whydidittakesolongtoinventthewaterwheel,windmill,harness? Societieshadtoinventinstitutionsbeforeinnovations. Before institutions arose, inventors tended to keep p their invention secret: No adoption No diffusion Slow progress
Universityof Zurich
Springsemester2013
Historyofinstitutions: EgyptiansandGreeksinventedbothinstitutionsandinnovationsthemselves: Pharaohsemployedengineers InGreekcitystates,kingsemployedinventorstoimprovewarmachines. Greekscholarsorganizedschoolsandchargedtuition. GreeksbuilttheLibraryatAlexandriainEgypttofundscholarship. Romansdidnotimproveoninstitutions,butimprovedgreatlyontechnologies, suchasaqueductsandwatermills;inventedcement.How:governmentfunding plusoccasionalsuigenerisrewards;fundingthroughtaxation. Darkages:Monasteriesbecamecentersoflearning;fundingthrough concentratedwealth.
Universityof Zurich
Springsemester2013
Thefirstpatentdatesbacktotheyear510B.C.andwasissuedinGreece.
"Ifacook kinvents i t adelicious d li i new dish,noothercookistobe permittedtopreparethatdishfor oneyear[...] [ ] Duringthistime,onlytheinventor shallreapthecommercialprofits fromhisdish.Thiswillmotivate others toworkhardandcompete p in suchinventions."
FirstpatentissuedinEnglandin1617.
Universityof Zurich
Springsemester2013
Historyofinstitutions: Middleages:creativityexploded;universitiesinventedaround1200;guilds (marketpower);mighthavetheoreticallyappropriatedbenefitsofinnovationbut becameaconservativeforceagainstupstartinnovators(andeventuallyvanished). Age A of fmonarchies: hi monarchs h became b patrons. t
Universityof Zurich
Springsemester2013
Historyofinstitutions: Prizes:anenduringincentive,especiallybetweenMiddleAges;reinvigorated lately. Napoleon:foodpreservation variousFrenchbureaucracies IntellectualProperty:camefrompatents,oropenlettersgrantingmonopoly privilege Patents privilege. Patents weretransformedintoourmoderninstitution. institution StatuteofMonopolies1623tolimitpatents(anticipatedinVenice1400s). StatuteofAnne1710;enactedtoreplacetheexclusiverighttoprintwhichwas heldbytheStationersGuild,underlicensefromtheCrown.
Universityof Zurich
Springsemester2013
Historyofinstitutions: Prizes:anenduringincentive,especiallybetweenMiddleAges;reinvigorated lately. Napoleon:foodpreservation variousFrenchbureaucracies IntellectualProperty:camefrompatents,oropenlettersgrantingmonopoly privilege Patents privilege. Patents weretransformedintoourmoderninstitution. institution StatuteofMonopolies1623tolimitpatents(anticipatedinVenice1400s). StatuteofAnne1710;enactedtoreplacetheexclusiverighttoprintwhichwas heldbytheStationersGuild,underlicensefromtheCrown.
Universityof Zurich
Springsemester2013
Universityof Zurich
Springsemester2013
Historyofinstitutions: Theproblemwithprizes: Secrecy Toocentralized( (whattotarget?) g ) Crowdingoutproblem Howbigshouldtheprizebe?
Universityof Zurich
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Historyofinstitutions: Early patents (Scotchmer (Scotchmers s book): Pendulum clock (1657) Torsion p pendulum clock ( (1675) ) Steam powered pump (1698) First modern regenerative steam engine (1767) Punch cardcontrolled looms (1802)
Universityof Zurich
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History of institutions: exploded largely driven by the lure of patents 19th Century: Invention exploded, 19th Century: A lot of sui generis funding by governments, some for commercial gain, but it was not institutionalized Wave tank experiments in Britain Experiments with telegraph Laying the transatlantic telegraph cable Babbage and his Difference Engine 19th Century: Private concentrations of wealth looking for something to be spent on Philanthropic foundations become the main source of R&D funding for Invented peerreview awhile;
Universityof Zurich
Springsemester2013
Universityof Zurich
Springsemester2013
Historyofinstitutions: WWIand(especially)WWIIchangedtheresearchclimate;UntilWWII, WWII foundations werethebigfundersofuniversityR&D Afterwards:radar,airplanes,atomicenergy TheMilitaryIndustrialComplex: AfterWWIIthefederalgovernmentbecamethemainpatronofR&D;inthe 1950s, about b 2/3 / of ftotal lU.S.R&D & waspaid d f forb bythe h federal f d lgovernment,and d muchofitwasgiventofirms DOD, ,DOE, ,contractresearch NIHandNSF,peerreviewofproposals Sputnik(1959):reinvigoratedfederalspending
Universityof Zurich
Springsemester2013
Historyofinstitutions: Development p of the Late 20th century: y Hybridization y of p public and p private research Should publicly funded research outputs be patented? This is not entirely a late20th century phenomenon Universities had long patented discoveries funded with nongovernment money Consistent with the policy of granting copyrights to university authors. BayhDole Act: patents can issue on federally funded research outputs, and grantee owns the patents.
Universityof Zurich
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Heller and Eisenberg Tragedy of the anticommons: Tragedy d of f the h commons: overuse of f commonly l owned d resources Tragedy of the anticommons: too many people have rights to exclude others How H to t avoid id tragedy: t d No transaction costs No strategic behavior No cognitive biases of participants More likely within closeknit communities than among hostile strangers
Universityof Zurich
Springsemester2013
Heller and Eisenberg Tragedy of the anticommons The Th problem: bl upstream research h in i the h biomedical bi di l sciences i i increasingly is i i l likely lik l to be private: supported pp by yp private funds carried out in a private institution privately appropriated through patents, trade secrecy, or agreements that restrict the use of materials and data The results Obstacles to innovation Spiral of overlapping patent claims Reaches ever further upstream in biotech
Universityof Zurich
Springsemester2013
Heller and Eisenberg Tragedy of the anticommons: In biotech: b h creation of f too many concurrent f fragments of f intellectual ll l property rights in potential future products or by permitting too many upstream patent owners to stack licenses on top of the future discoveries of downstream users Is licensing a way out? No, unable to procure full set of licenses Adds uncertainty of research (pending patents) Bundling licenses (as in music), patent pools: heterogeneous interests, asymmetry of actors, actors no substitutes, substitutes cognitive biases
Universityof Zurich
Springsemester2013
Patent features: Reward ex post how to fund research? Entrepreneurship (own & family funds, bank loans, Venture Capital, Business Angels IPO, Angels, IPO joint ventures, ventures spinoffs) Invention business on its own right; Edisons invention factory subsidize high end research (light bulb) with lowend contract research Inhouse innovation; German chemical industry as an example; still many important private R&D labs around (AT&T's Bell Labs, IBM, PARC)
Universityof Zurich
Springsemester2013
Patent features: Patent application li i complicated li d (at ( least l i the in h early l days d of f the h patent system) ) high transaction cost High g enforcement cost ( (Charles Goodyear y is reported p to have said he spent p more on lawyers than on R&D) Litigation creates uncertainty Heller/Eisenberg paper
Universityof Zurich
Springsemester2013

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TheEconomicsofInnovation

Prof.Dr.UlrichKaiser Departmentof BusinessAdministration Universityof Zurich

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