Rewarding Sequential Innovators: Prizes, Patents, and Buyouts

Posted: 12 Dec 2006

See all articles by Hugo A. Hopenhayn

Hugo A. Hopenhayn

University of California, Los Angeles (UCLA) - Department of Economics

Gerard Llobet

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR)

Matthew F. Mitchell

Rotman School of Management

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Abstract

This paper presents a model of cumulative innovation in which firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. Monopoly power is a scarce resource to be allocated across innovators who arrive at various times. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope. This optimal patent menu can be implemented with a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. When a larger fee is paid initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract. We relate this mechanism to the proposed compulsory licensing schemes.

Suggested Citation

Hopenhayn, Hugo A. and Llobet, Gerard and Mitchell, Matthew F., Rewarding Sequential Innovators: Prizes, Patents, and Buyouts. Journal of Political Economy, Vol. 114, pp. 1041-1068, December 2006, Available at SSRN: https://ssrn.com/abstract=951222

Hugo A. Hopenhayn

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

Gerard Llobet (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
SPAIN
34 91 429 0551 (Phone)
34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Matthew F. Mitchell

Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada

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