Mark Lemley and I have posted a draft of our paper, Spillovers, on ssrn. We welcome comments – here or by email. I have pasted the abstract below the fold. I should note that in addition to spillovers associated with IP and innovation, we discuss broader implications of our theory (e.g., with respect to the network neutrality debate and property rights theory).
Economists since Demsetz have viewed property rights as a way to internalize the external costs and benefits one partyâ€™s action confers on another. They have thought this internalization desirable, reasoning that if a party didnâ€™t capture the full social value of her actions she wouldnâ€™t have optimal incentives to engage in those actions. Measured by this standard, IP rights are inefficiently weak. There is abundant evidence that the social value of innovations far exceeds the private value. But there is also good evidence that, contrary to what economists might assume, these spillovers actually encourage greater innovation. The result is a puzzle for Demsetzians.
In this article, we offer three insights that help to explain the positive role of innovation spillovers. First, we note that in IP, unlike real property, a wide range of externalities matter, because IP rights are much less certain than property rights, and because the decision to create a legal entitlement will determine whether or not a transaction must occur. Second, we make the point that while society needs some ex ante incentive to innovate, it doesnâ€™t need (and doesnâ€™t particularly want) full internalization of the benefits of an invention. Third, we observe that even where internalizing externalities is desirable, property rights do not in fact do so perfectly, and they create problematic distortions in circumstances in which the buyer in a transaction makes productive reuse of the work. The result of combining these insights is that at least where innovation is concerned, we cannot rely on the easy equation of property rights with efficient internalization of externalities.