Academic journal article The Cato Journal

The Stationary Bandit Model of Intellectual Property

Academic journal article The Cato Journal

The Stationary Bandit Model of Intellectual Property

Article excerpt

We propose a new model of intellectual property that presents a different view than the market failure/monopoly rent model advanced by Arrow (1962), in which governments protect inventors from private theft. Instead, using Olson (1993), we represent a public theft model of intellectual property arising when entrepreneurs acting in global markets seek protection from a stationary bandit (their home government) principally against the depredations of other governments (the roving bandits). This model explains why institutional quality matters to the global location of R&D intensive industries, such as biopharma, and why so much intellectual property is located in tax havens.

Government, Citizens, and Intellectual Property

The first duty of government is to protect its citizens. Put the other way, the value to a citizen of a strong government is to protect their life, liberty, and property from the depredations of others. In the political romantic view, this is the protection of the weak by the strong. But the real nature of the bargain is that the weak must then pay tribute to the strong. In his antisocial contract model of the origin of government, Mancur Olson (1993) argued that governments offering protection are essentially "roving bandits" who have settled down to establish a monopoly on theft as "stationary bandits" who protect their tributes--now called tax-paying citizens--from external threats. Stationary bandits still plunder their captives to the maximum extent, but they do so rationally, leaving them sufficient resources and furnishing peaceful order and public goods to maximize the future stream of taxes.

In using the stationary bandit model of government, (1) we argue that new ideas--of the sort that become patents, copyrights, and trademarks--emerge as economic rights, (2) born global into a world of roving bandits. The holders of those rights seek protection from a stationary bandit who extracts tribute in return. The key insight of our model, however, is a sharper distinction of who those bandits are. In the standard model of intellectual property, benevolent national governments grant a temporary monopoly privilege to protect the creative inventor citizen from the unscrupulous depredations of private competitors or even consumers. The argument goes that without a legislative prohibition on copying (institutionally defined as theft), a competitive market will provide only weak incentives to invest in creating new ideas--that is, there will be market failure (Arrow 1962), and society will suffer a suboptimal level of creative-inventive activity (Posner 2005). In the standard model, government protects holders of intellectual property from private theft, making the nation safe for private creativity.

Now private theft is certainly a problem, but we maintain that public theft is much worse. The main predators on intellectual property, we argue, are not private competitors (e.g., copying a technology) or individual consumers (e.g., illegal downloads), but other governments through their client services and cronies, who variously engage in outright theft or coercive measures to diminish and deplete the value of their intellectual property (Ezell, Nager, and Atkinson 2016). A common example is the treatment of biopharma, routinely subject to outright theft, compulsory licensing, and other practices that diminish its value (Wu and Ezell 2016). In our new model, vulnerable subjects seek protection for their private economic property from the banditry of other governments, by registering their property with a strong government whom they trust to be powerful enough to protect it as they peacefully engage in trade and commerce throughout the world. The origin of intellectual property is when one of these roving bandits finds it worthwhile to become a stationary bandit by protecting the idea (the entrepreneurial discovery and the economic asset) from organized theft by other governments and settling down as a monopoly exploiter. …

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