Prizes or patents

Josesph Stiglitz’s recent article (“Give prizes not patents“) in the New Scientist voices a valid concern that patents may be stifling–not enhancing–innovation.  He worries that IP (Intellectual Property) attorneys are involved in an “enclosure movement” by which a firm tries to patent a new idea as well as many complimentary or peripheral ideas which surround the original innovation.  Stiglitz also articulates concerns over WTO’s TRIPS agreement. 

The solution proposed by Stiglitz is prizes.  Stiglitz writes:

“A prize for medical research would be one alternative.  Paid for by industrialised nations, it would provide large prizes for cures and vaccines for diseases such as AIDS and malaria that affect hundreds of millions of people.  Me-too drugs that do no better than existing ones would get a small prize at best.”

Prizes work only if we know exactly which innovation society needs; this limits their scope.  For instance, it would have been impossible ex ante to have had a prize for the inventor of the cell phone, since no one had conceived of the concept before it was actually developed.

Also, using prizes has large informational demands.  How large should the prize be?  It must be high enough to induce researchers to search for cures, but setting a prize too high would use up valuable funds which could be used in other arenas.  How does one determine if a drug is a me-too drug or not?  If a vaccine provides immunity to AIDS for 50% of cases, would this development merit the full prize?  If not, how large should the prize be?  What if the vaccine was only 10%, or 1% or 0.1% effective? 

In general, prizes create a great incentive for innovators to find cures to known serious diseases.  Prizes may lead to great results but the scope of their impact is likely to be limited by the informational requirements outlined above.  Holistically replacing the patent system with prizes is untenable.  Since innovations are by definition new technologies, it would be impossible to create prizes for every invention which society has not yet invented.  Relaxing the stringency of the patent system by reducing the length of patents and disallowing the use of “enclosure patenting” would help improve the overall IP system. 

For an insightful analysis of the TRIPS system on Indian pharmaceutical production, see Chaudhuri, Goldberg and Gia (NBER 2003) “Estimating the effects of global patent protection in pharmaceuticals: a case study in Quinolones in India“.