Lost Horizons the Noncooperative Management of an Evolutionary Biological System

39 Pages Posted: 21 Nov 2002

See all articles by Timo Goeschl

Timo Goeschl

University of Heidelberg - Alfred Weber Institute for Economics

Timothy M. Swanson

University College London - Department of Economics and Faculty of Law

Date Written: October 2002

Abstract

This paper studies the interaction between two dynamic domains, (1) an evolutionary biological system ('the environment') whose behaviour determines the availability of a resource stock, and (2) an industry where access to the resource stock is determined by the outcome of a patent race. The specific setting of the model is that of managing microbial resistance to antibiotics. Here, resistance develops in response to the use of antibiotics above a threshold level. We show that the optimal policy from society's point of view is to generate through R&D a diversified portfolio of antibiotics that maintains a steady-state of resistance. In practice, however, the management of the resistance stock is left to an industry operating under a system of intellectual property rights (IPR). There, firms are involved in a sequence of patent races to supply the antibiotic with the best cost-effectiveness ratio. The paper studies the structure of the patent race within the industry against the background of pathogen evolution. We show that a multi-firm industry operating under an IPR-based incentive mechanism is unlikely to generate the socially optimal number of antibiotics because IPR systems (1) create incentives for sequential rather than simultaneous innovation; (2) generate incentives that decline with the number of previous (shelved) discoveries; and (3) generate incentives that respond perversely to increases in biological system velocity. These results highlight the importance of well-designed dynamic incentives for managing resource stock dynamics.

Keywords: Resource Management, Intellectual Property Rights, Evolution, Resistance, Antibiotics

JEL Classification: I0, Q0

Suggested Citation

Goeschl, Timo and Swanson, Timothy M., Lost Horizons the Noncooperative Management of an Evolutionary Biological System (October 2002). FEEM Working Paper No. 89.2002, Available at SSRN: https://ssrn.com/abstract=344322 or http://dx.doi.org/10.2139/ssrn.344322

Timo Goeschl (Contact Author)

University of Heidelberg - Alfred Weber Institute for Economics ( email )

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D-69115 Heidelberg
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Timothy M. Swanson

University College London - Department of Economics and Faculty of Law ( email )

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United Kingdom
+44 (020) 7-679-58 (Phone)
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