Academic journal article Research-Technology Management

Patents and the Innovation Incentive: An Interview with Jim Bessen: Jim Bessen Talks with James Euchner about the Role of Patents in Encouraging-Or Discouraging-Innovation

Academic journal article Research-Technology Management

Patents and the Innovation Incentive: An Interview with Jim Bessen: Jim Bessen Talks with James Euchner about the Role of Patents in Encouraging-Or Discouraging-Innovation

Article excerpt

Patents have been a cornerstone of our economic system; their continued existence has been justified on the basis of their importance in driving innovation. However, recent studies by Jim Bessen and colleagues have raised questions about the effectiveness of the patent system in practice in achieving this goal. In this interview, Bessen discusses his studies, the root causes of disincentives created by today's patent system, and what might be done to improve its effectiveness.

JIM EUCHNER [JE]: Let's start with a basic issue. The policy purpose of patents is to increase innovation. Do they fulfill this goal?

JIM BESSEN [JB]: Sometimes yes, and sometimes no.

There are a couple of different ways that people think about how patents spur innovation. Most economists see the most important issue as the incentive they provide. If a company or a patent-holder has an exclusionary right to earn above-normal profits, that serves as a reward to innovation, an economic incentive to innovate.

A second and really closely related reason is that patents may facilitate trade in technology. Often, a small inventor may have a good idea but not have the assets needed to manufacture it; they can profit by licensing or selling the patent to a manufacturer, but again, the economic value derives from the exclusionary right.

There's a third factor, which is that patents provide a way of disclosing information to the world. I won't go into that in great detail, but disclosure is supposed to help others innovate.

JE: You performed an economic study that found that by the 1990s, in most cases, the cost of the patent system outweighed the benefits. Can you talk about how you were able to measure the costs and benefits?

JB: This was a large-scale project that Mike Meurer and I undertook, and it's been extended by John Turner and researchers at the University of Georgia. We looked at the question, "Do patents provide an incentive to innovate to their owners?" We measured the positive value that patents provide in a couple of different ways.

There are also costs to the patent system, however. One of those costs is the cost of getting patents and hiring the lawyers, of course, but perhaps a more significant cost, particularly in recent years, is the cost imposed by litigation-- particularly litigation related to cases where the defendant inadvertently infringes. We can get estimates of what those costs are.

We can estimate the value of a patent in a couple different ways. One is by observing the renewal behavior, the fee-paying behavior, of patent-holders--the idea being that the more valuable a patent is, the more inclined someone will be to pay the fees to keep it in force. Another analysis we can do, at least with publicly listed companies, is to look at the firm's market value and try to determine how much of that market value derives from the ownership of patents by using multiple regression techniques.

We did both of these things, and we also looked at surveys and methods developed by others that attempt to capture patent values, including the new patent options techniques. We were able to get a set of estimates about patent value that are fairly consistent across these different methods. And then we were able to estimate the cost of patent litigation to defendants by looking at what happens to the stock market value of a defendant when it gets sued.

This is a large-scale study, and the bottom line is this: in some industries, there's no doubt that the patent system provides very strong positive incentives, as it's supposed to do. The best industries for patents as an incentive to innovation are pharmaceuticals and chemicals.

In many other industries, though, particularly starting in the late 1990s, the rise in litigation costs has basically swamped the benefit of the patent system to firms, to the point where they exceed the benefits. …

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