Gavin R. Putland,  BE PhD

Wednesday, October 19, 2005 (Comment)

Patently perverse incentives

. . . Patents are land-like assets because they confer monopolies — in particular, monopolies on inventions. An invention has an intrinsic value, and as other people create demand for it they give it a community-created value. But neither value is realizable as a separate cash flow (licensing fees) until someone successfully claims the invention (i.e. patents it). Even then, people will pay for the patented idea only in proportion to its superiority over the best unpatented one (the Ricardian constraint). Large firms try to push back the Ricardian boundary by making excessively broad claims, by patenting numerous small variations on their own and other inventors' ideas, and by claiming ideas that are obvious or already in the public domain. The more they succeed with such tactics (commonly called “land grabs”!), the more patent-licensing fees resemble all-devouring rents. Firms can patent ideas without using them (yet), further restricting the range of unpatented ideas and adding a speculative component to the licensing fees for ideas that are actually in use. The result of all these “incentives” is that far more inventive genius is expended on patent claims than on actual inventions.

[Note 4 to the original edition of Cuckoo Economics (Oct.19, 2005), posted here Aug.18, 2012. There is also an abridged edition.]

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