The investigators study R&D environments where opportunities to invest are constrained by imagination as well as by resources. This simple and realistic premise has many implications for the design of intellectual property, as well as for other institutions that support R&D.
First, since ideas for investments do not arrive simultaneously, there is a tradeoff between preserving options and the cost of delay. Investing early can preempt investments in better ideas that arrive later. An incentive problem arises because a private recipient of an idea may not reap the social benefit of preserving options. This leads to the question of how to organize incentives so that recipients of ideas take account of social options.
The investigators characterize a socially optimal threshold for accepting an idea rather than discarding it. The threshold is on the net social value. They prove that the threshold should become less discriminating as time passes without filling the market niche. They then study how reward mechanisms can (or cannot) achieve that outcome.
Patents are an imperfect tool because their private value cannot be tailored to R&D cost. Patent value does not scale with social value. In the special case where ideas differ only in the quality of the innovation, but not in R&D cost, patents will over-encourage low-cost ideas with low quality, and under-encourage high-value ideas that also have high cost. Prizes might do better, for example, when ideas differ only in their R&D costs. The prize should increase with delay.
Second, because ideas must be compared in order to find the best one, it may be optimal to collect ideas, as venture capitalists do. The investigators illuminate the tension between the social benefits of allowing venture capitalists to collect and screen ideas, and the competitive goals of the patent system. They show that the optimal reward system must be more generous when ideas are aggregated in the hands of a few venture capitalists than when widely dispersed.
Third, the scarcity of ideas explains the open-source movement in a new way. In many arenas, there cannot be ideas for further advance unless previous technologies are disclosed. If ideas are scarce, the relevant disclosure cannot be accomplished under contract, because it is not known where the next idea will surface. The disclosure and sharing obligations of the open source community overcome this problem.
Finally, the scarcity of ideas has implications for public funding. Unlike patents and prizes, public support can be given when the innovator actually needs it, which is before investing. However, giving the money in advance creates a problem for knowing which researchers to fund, especially when the researchers have different idiosyncratic ideas, and different idiosyncratic capabilities. The investigators characterize the optimal blend of pre-screening and experience rating, especially when it is understood that even good ideas may fail.
The project brings economic theory into closer contact with the R&D experience of recent decades. For example, the scarcity of ideas should lead to economic profit, as it did in Silicon Valley in the 1990s, rather than to the profit dissipation predicted by patent races.
The project's broader impact is on the design of programs for funding R&D.
