A Transaction Cost Theory of Patent Law

Abstract

Patent law is under-theorized in the sense that the predominating incentive-based justifications cannot by themselves adequately explain empirical evidence on patenting gathered by research economists. This article provides an alternative justification for patent law based on private transaction costs savings offered by patent law in comparison to alternative options available to those who wish to exploit information assets. In particular, it identifies striking parallels to corporate law as described in recent scholarship and shows how patents act as affirmative asset partitions, ameliorate significant team production problems, and encourage technology transfer. Even if the patent system provides no significant incentives to invent, it can be explained and justified in terms of transaction costs savings alone.

Keywords: patents, transaction costs, new institutional economics, team production, asset partition, technology transfer, incentives

JEL Classification: O3, H42, K00, L1