Economic Theories about the Benefits and Costs of Patents

By Mazzoleni, Roberto; Nelson, Richard R. | Journal of Economic Issues, December 1998 | Go to article overview

Economic Theories about the Benefits and Costs of Patents


Mazzoleni, Roberto, Nelson, Richard R., Journal of Economic Issues


Since the early 1980s, patent policy in the United States has been strengthened, broadened, and extended to areas and actors where earlier patenting was relatively rare. The Court of Appeal for the Federal Circuit, established in 1982 to deal with patent litigation cases, has upheld a significantly higher proportion of district court decisions of patent validity than earlier was the case [Dunner 1988]. Increasingly, patents have been granted for inventions or discoveries that are a far distance from practical applications; this trend has been particularly evident in biotechnology. The Bayh-Dole Act of 1980 and successive legislative initiatives have effectively pushed universities and government laboratories to apply for patents on the results of government-sponsored research, whereas the earlier norm was to place such results in the public domain. The trend toward strengthening intellectual property rights has expanded to the international arena first through the GATT negotiations and now through the proceedings of the World Trade Organization [UNCTAD 1994]. These policy trends make it urgent to reflect upon some basic questions regarding the patent system.

What are the social benefits and costs of awarding patents for inventions? Many economists and patent lawyers seem to think that the answer to this question is simple and settled, at least theoretically. In this paper, we discover that the answer certainly is not simple and currently not well settled. There are a number of different theories that give different answers and only limited knowledge of where these different theories apply.

The most familiar theory - what we will call the invention motivation theory - is that the granting of patents increases the supply of useful inventions, and that the cost of patents is the restriction on access to completed inventions that the holding of a patent creates. An implication is that, if possible, one should not award patents in contexts where invention would proceed without them. However, the passage of the Bayh-Dole Act encouraged the taking out of patents on inventions already brought into existence under federal grants and contracts. The argument was that the presence and enforcement of a patent would encourage commercialization of the inventions, which would be unlikely to occur in the absence of a patent. More recently, the National Institute of Health (NIH) applied for patents on the gene fragments it identified through research in public laboratories using public monies. It was well understood that knowledge of such coding is a long way from even a prototype of a new useful pharmaceutical or medical treatment. The argument was that the presence of such patents would motivate and enable coordination of needed follow-on research that would lead to something useful. This is still a different argument about what patents are good for.

It is apparent that there are several different theories about the benefits and costs of granting patents. A principal purpose of this paper is to disentangle the theories and clarify their points of divergence.

The existence of several different theories is not per se an indication of intellectual troubles. The empirical work that has been done on the effects of patents suggests that the kinds of benefits and costs associated with patents differ across economic sectors and across kinds of inventions. Thus, we well may need to have several different theories that apply in various combinations in different contexts. Rather, the problem is twofold. First, in many cases the assumptions about the context of innovation presumed in the different theories have not been well sorted out, and the implications of different contexts have not been considered. Second, the empirical domains where the different theories are relevant need to be mapped out.

This paper is almost exclusively concerned with the first task. In the next section, we sort out the different theories and the contexts they assume, sometimes explicitly but often implicitly. …

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