Innovation and Institutions: Rethinking the Economics of U.S. Science and Technology Policy

Abstract:     
The U.S. promotes and produces innovation through a wide range of interdependent institutions, ranging from the grant of an intellectual property right to the direct funding of research. The justification for using multiple instruments is intuitively rather simple: no single institution would efficiently supply all classes of innovations. Why this intuitively simple explanation holds true in theory and practice is a much more difficult question. The answer depends in part on what type of "good" innovation is and in part on how amenable certain types of innovation are to certain forms of institutional provision. To put it more concretely, (1) innovation is a public good that acts as an input for producing a wide range of dependent goods, private to public, including more innovation; (2) various forms of innovation market failure arise, often depending on the type of dependent good that the innovation is expected to produce; and (3) certain institutions are better suited for correcting certain forms of innovation market failure. A comprehensive understanding of each of these aspects of innovation allows one to address the theoretical yet practical policy questions of what the appropriate "mix" of institutions is (or might look like) and whether the current system is doing well at providing the efficient amount of innovation.

This paper integrates the dynamic nature of the innovative process with classic economic theory of public goods and investment decision making. The focus is generally on the ex ante considerations that precede public or private investment in research. Innovations are classified in terms of their expected uses. The underlying purpose of this paper is to formulate a framework for evaluating science and technology policy and for determining what form of government institution is best targeted for particular classes of innovation.

Parts I (A Model of Innovation), II (The Market for Innovation), and III (Institutional Innovation) develop an analytical framework for innovation policy. There are three foundational themes explored: (1) the nature of innovation itself, (2) the innovation market, and (3) institutions. Innovation and the innovation market must be clearly understood for an assessment of institutions to proceed, and the institutions themselves must be well understood for any comparison to be meaningful. To ground the theoretical analysis in an existing legal regime, Part IV analyzes the Mixed Incentive System for Publicly Funded Researchers created by the Bayh-Dole Act, in which intellectual property rights and government support are jointly used to promote, produce, and commercialize federally funded research results.

Keywords: Innovation, information, science, technology, intellectual property, patent, institution, Bayh-Dole

JEL Classifications: D80, D81, H41, K10, O31, O32, O34

Accepted Paper Series