The Social Efficiency of Fairness

Abstract:     
Property rights provide incentives to create information but they also provide incentives to hoard it prior to the award of protection. All-or-nothing rights, in particular, limit prior sharing. An unintended consequence is to slow, not hasten, forward progress when innovation hinges on combining disparately owned private ideas. In response, we propose a solution, based on a reward defnition of "fairness," that unblocks innovation by increasing willingness to share private knowledge.

We present four arguments. First, we show that fairness can increase the rate of innovation. Welfare can improve both in the absolute sense of enabling new projects and in the relative sense of reordering the social sort order of which projects individuals prefer to undertake. Second, in contrast to models of "other regarding" preferences, we show how self-interest alone is suffcient to justify fairness in a one-time encounter. Third, we show how this problem is more acute for information than for tangible goods. Fourth, we argue that liability rather than property rules can be more conducive to innovation based on information reuse and recombination.

This work has application to newspaper business models, Google book search, biotech gene sequencing, and other industries where one organization might reuse information developed by another.

Number of Pages in PDF File: 41

Keywords: Intellectual Property, Innovation, Information Asymmetry, Fairness, Shapley Value, Incentives, Contracts, Mechanism Design

JEL Classification: A13, D23, D45, D8, K11, K12, O31, O34, P16

working papers series