Intellectual property and the efficient allocation of social surplus from innovations

Abstract

In the modern theory of innovation, monopoly plays a crucial role both as a cause and an eect of creative economic activity. Innovative firms, it is argued, would have insucient incentive to innovate should the prospect of monopoly power not be present. This theme of monopoly runs throughout the theory of growth, international trade, and industrial organization. We argue that monopoly is neither needed for, nor a necessary consequence of innova- tion. In particular, intellectual property is not necessary for, and may hurt more than help, innovation and growth. We show that, in most circumstances, competitive rents allow creative individuls to appropriate a large enough share of the social surplus generated by their innovations to compensate for their opportunity cost. We also show that, as the number of pre-existing and IP protected ideas needed for an innovation increases, the equilibrium outcome under the IP regime is one of decreasing probability of innovation, while this is not the case without IP. Finally, we provide various examples of how com- petitive markets for innovative products would work in the absence of IP and critically discuss a number of common fallacies in the previous literature.

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