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The Social Efficiency of Fairness

34 Pages Posted: 30 Jul 2012 Last revised: 28 Oct 2014

Gavin Clarkson

New Mexico State University - Department of Finance; Rice University - Jesse H. Jones Graduate School of Business

Marshall W. Van Alstyne

Boston University – Questrom School of Business; Massachusetts Institute of Technology (MIT) - Sloan School

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2014

Abstract

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

Clarkson, Gavin and Van Alstyne, Marshall W., The Social Efficiency of Fairness (October 25, 2014). 1995-2011 TPRC Conference. Available at SSRN: https://ssrn.com/abstract=2119736

Gavin Clarkson (Contact Author)

New Mexico State University - Department of Finance ( email )

PO Box 30001
MSC 3FIN
Las Cruces, NM 88003-3001
United States
575-646-3636 (Phone)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Marshall W. Van Alstyne

Boston University – Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-3571 (Phone)

HOME PAGE: http://questromapps.bu.edu/mgmt_new/Profiles/VanAlstyneMarshall.html

Massachusetts Institute of Technology (MIT) - Sloan School ( email )

Center for Digital Business
5 Cambridge Center - NE25, 7th Floor
Cambridge, MA 02142
United States
617-253-0768 (Phone)

HOME PAGE: http://web.mit.edu/marshall/www/home.html

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