Launching the Ideas "Gold Rush"
A proposal for an "Ideas Lottery"
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In a few prior essays, I discussed the merits and drawbacks of patenting as a means of incentivizing innovation. I came to the conclusion that patents, while highly imperfect, are not as problematic as they initially appear. That said, there is certainly a lot of room for improvement to the IP system that may hopefully accelerate the rate of innovation. After years of mulling over a number of different concepts, I have come up with a system that may be workable: The Ideas Lottery.
The general consensus in the economics literature is that the free market will naturally underinvest in science, research, and innovation. The reasons for this are something that I have already covered in prior essays, so I will not restate it here. In brief, the free market rewards copying, not so much invention or innovation. It’s cheaper and less risky to remain on the sidelines and copy someone else’s work after they have already invested resources into a new idea. Furthermore, basic research, which has no clear return on investment, is largely ignored by the private sector.
Because of this natural underinvestment, governments around the world have developed various tools for incentivizing innovators. These tools include awarding prizes, tax credits, tax deductions, direct grants, and patent protection. But all methods fall far short of ideal. Prizes require an authority to predict which innovations society needs and value them before they are invented; something that is incredibly hard to do. Tax credits and deductions can be gamed by the private sector. Grants are bureaucratic and tend to focus on incremental research rather than breakthrough ideas. Patents can be exploited by trolls and can permit monopoly pricing that may “lock out” competition and follow-on innovation.
The core problem at the heart of all of these approaches is the difficulty of determining the value of an idea. In a prior essay, I toyed around with a variation of Kremer’s patent auction system and Harberger taxation as a possible means to tease out this value. Armed with a rough valuation, it becomes possible for the government or private entity to “buy out” an idea without the monopoly “holdout problem” that plagues the patent system today. But my proposal had its problems as well. On paper, I knew it would work well for some ideas, but not as well for others. The reason for this variation was not very clear to me at the time of writing.
A Continuum of Excludability
In further research, I discovered that part of the difficulty in valuing ideas is a variation in the degree of excludability. Amy Kapczynski & Talha Syed discussed this “continuum of excludability” in the Yale Law Journal. In their paper, they illustrate how 30,000 people die every year in ICUs from infections resulting from central-line catheters, a problem that is related to the growing emergence of antibiotic-resistant bacteria. The IP system, of course, would reward a company handsomely for developing a new antibiotic drug that saves these lives.
But the solution doesn't necessarily need to be a new drug. In fact, the New England Journal of Medicine developed a life-saving innovation that cut the number of these infections by two-thirds: a simple checklist that includes standard hygienic and communication practices that can be performed at any ICU at virtually no cost. Even a robust patent system, of course, would protect and reward the creation of a new drug, but it would struggle to reward the developer of this checklist. Both inventions have similar social value, but one has greater market value.
The reason for this is the degree of excludability. Even if one could patent the checklist, it would be impossible to monitor the activity taking place at every ICU to ensure that royalties were paid when the system is used. A drug, on the other hand, is highly excludable; the legal system can prevent copies from being produced and sold on the market quite readily. The checklist is an immaterial good that is not excludable relative to a material drug that is. The IP system, therefore, favors the latter over the former.
Thus, when we discuss the market value of a patent or idea, that value is derived from two major components: the social value moderated by the fraction of that value that is excludable in the marketplace. Much of the research on IP tends to focus on pharmaceuticals because drugs are easily patented and excludable, making research straightforward. But this does a disservice to other ideas that are less tangible but otherwise have equal or higher social value.
Putting this all into a crude formula, the market value (V) is the social value (S) moderated by the fraction of social value that is excludable (C). Armed with the knowledge that the market value is comprised of two core components, we can reform the IP system to create a patent+prize system that issues bonuses to innovations in categories of ideas that are currently neglected, thereby optimizing incentives.
The Idea Lottery
As I discussed in prior essays, crucial to the workability of any improved IP system is to determine the market value of an idea. Ideas are non-rivalrous; my use of an idea does not prevent anyone else from using it. To create value for the inventor that incentivizes further investment, the IP system establishes an artificial (but temporary) scarcity of ideas. There is an inherent tension here, as I discussed in The Tragedy of the Anti-Commons, between the allocative efficiency and investment efficiency of property. The optimal balance, some argue, is to transform property that is non-rivalrous, like IP, into partially publically owned property.
To do this, I suggested that we turn to Harberger Taxation, where the owner of the idea self-assesses the value. In exchange for protection, the inventor must pay a ~2 percent tax on that value every year. The caveat, of course, is that anyone can buy the idea at this value at any time, removing the monopoly pricing power that is enjoyed under the current dichotomous property rights system. Aside from giving us a rough value, a recurring tax would discourage patent trolls by imposing a cost on squatting on IP. It would also make patent litigation cheaper by relieving the courts of having to ascertain the damages in the event of infringement.
The problem here is, of course, that many good ideas are simply not cost-effective to patent or publish in the current system, let alone one with a 2 percent additional tax. When imposing an additional tax, we risk more IP being driven underground, concealed as trade secrets, or simply not developed at all. How can we bring these ideas out of the shadows at the same time? We can do this with a prize, but one that would not require the government to look into a crystal ball; one that would base the prize on the value of the idea and its “social coefficient” determined by the level of excludability.
To bring inventions out of the shadows, all published ideas could be entered into an “Idea Lottery.” Roughly 20-30 percent of published ideas would be randomly bought out at face value by the government and immediately placed into the public domain for all to freely use. I suggest that the buyout be random to avoid rent-seeking, but I will leave open the possibility that a board of experts or a Quadratic Assembly could pick and choose ideas for buyouts as well.
In addition, as suggested in Kremer’s buyout system, the government would pay a markup, or what I call a “social bonus” on top of the market value. However, unlike a fixed percentage markup as envisioned by Kremer, my social bonus would be determined by the type of IP and its corresponding level of excludability. Pharmaceuticals, for example, would have little markup because the market value already includes an expectation of high returns due to excludability. Other forms of IP, however, could reap significant bonuses that would not be rewarded in the current system.
From the perspective of an inventor or researcher, a 20-30 percent chance of an immediate buyout plus a social bonus is a significant incentive to publish IP. Suddenly, keeping your ideas a secret is no longer very attractive. Further, because the bonus awards non-excludable ideas handsomely, they will be better incentivized to conduct research in areas that normally would be neglected as unprofitable. If an idea is not selected by the lottery, there is no harm; it was already properly valued and thus the inventor would pay a 2 percent tax in exchange for regular IP protection. That said, the inventor could relieve himself from the tax at any time by releasing the idea into the public domain.
Now, a critic might argue that companies will develop lots of IP, valuing it very highly in hopes of securing a huge award and social bonus, then open source everything else so as not to pay taxes. This kind of “gaming,” I would argue, is not that big a problem. Sure, the government may have overpaid for one idea, but it got many others released into the public domain in exchange. To the extent that this could be a problem, the percentage of buyouts could be adjusted and varied. Perhaps also, a small percentage of ideas could be randomly deemed “unreleasable” from the 2 percent tax. This would create enough risk to deter gaming of the system.
We might envision this as analogous to a “prospector system” with inventors hoping to strike gold in the discovery of new ideas. The government creates abstract “land” that can be “mined,” with those mining rights “leased” (2 percent annual tax) to prospectors (inventors) who seek to find gold (breakthrough innovations). Some leases will have negative returns, many will be moderately profitable, and others will strike it rich (winning the Ideas Lottery and receiving the social bonus). If history is any indication, the prospect of striking it rich could provide humanity with exactly what it needs; an ideas “Gold Rush” that would parallel the enthusiasm and vigor of finding gold in the hills.
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