The Social Efficiency of Fairness
34 Pages Posted: 30 Jul 2012 Last revised: 28 Oct 2014
Date Written: October 25, 2014
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.
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
Suggested Citation: Suggested Citation