The Social Efficiency of Fairness
New Mexico State University - Department of Finance; Rice University - Jesse H. Jones Graduate School of Business
Marshall W. Van Alstyne
Boston University - Department of Management Information Systems; Massachusetts Institute of Technology (MIT) - Sloan School
October 25, 2014
Gruter Institute Squaw Valley Conference – Innovation and Economic Growth, 2010
Boston U. School of Management Research Paper No. 2009-11
MIT Sloan Research Paper No. 4765-09
Property rights provide incentives to create information but also incentives to hoard it before award of protection. Even after award, others who might supplement that idea lack bargaining power until they too secure property rights. An unintended consequence is to slow, not hasten, progress when innovation hinges on combining disparate private ideas.
We show formally that fairness can increase innovation. Welfare improves both in the absolute sense of enabling new projects and in the relative sense of reordering projects that people undertake. Second, in contrast to models of "other regarding'' preferences, we show how self-interest alone is sufficient to justify fairness in a one-time encounter. Third, we show how the hold-up problem is worse for information than for tangible goods. Fourth, we sketch a practical way to promote fairness using liability rules rather than property rights. Liability rules give idea-developers greater flexibility and incentives while protecting idea-originators from exploitation.
Number of Pages in PDF File: 35
Keywords: Intellectual Property, Governance, Information Asymmetry, Innovation, Fairness, Shapley Value, Incentives, Contracts, Mechanism Design
JEL Classification: A13, D23, D45, D8, K11, K12, O31, O34, P16
Date posted: November 28, 2009 ; Last revised: January 7, 2015