Patents, Prizes, and Property

Abstract

The traditional view is that patents and prizes stand in stark contrast to one another as means for promoting innovation. On this view, patents are government grants of private property rights that result in market-based, ex post rewards for innovative activity in the form of supracompetitive pricing. Prizes are awards determined ex ante by public regulators in exchange for placing the innovation into the public domain. Recently, several commentators have questioned this dichotomy, noting that patents and prizes can function economically in quite similar ways. Although there is much value in this insight, the property-based remedies that often flow from patent infringement can result in important distinctions between patents and prizes. These differences in turn may have substantial effects on the innovative process. Nonetheless, patents should still generally be classified as regulatory tools used by governments to achieve the social end of innovation. To be certain, legal exclusivity — like other regulatory tools — may be effected via private property rights to economize on information and administrative costs. Yet, the theoretical justifications for patents, which primarily sound in promoting social aims, should not be confused with the aims of traditional areas of private law — such as real property, contract, and tort — which, to a much more notable degree, protect individual interests.

Keywords: patents; property; prizes; grants; research & development; regulation; invention; innovation; transaction costs; public domain

JEL Classification: K11, K2, O34