Book Review
Innovation Policy and the Economy

By
Cynthia Z. Cohen

(Volume 7, edited by Adam B. Jaffe, Josh Lerner, and Scott Stern.
Cambridge, M.A.: MIT Press, 2006)

     This collection, part of an annual NBER series, includes five separate essays on the theme of innovation policy and the economy. The goal of the series is to demonstrate the role that economic theory and empirical analysis can play in evaluating policy, but since this is a book with many disparate audiences, ranging from the federal patent offices to corporate media offices to state universities, it would be more accurate to refer to the “goals” and “policies” of the disparate players. Another purpose of this series, then, is to construct an unified audience and unified policymaking authority to coordinate the goals and policies. 
     The first essay, “Is the Pharmaceutical Industry in a Productivity Crisis,” pokes holes in the exaggerated reports that research productivity in the pharmaceutical industry has fallen off in the last decade. Iain Cockburn faults the exaggerated reports for failing to use a quality adjusted proxy to measure output, for failing to assess R & D inputs with inflation-adjusted measurements, and for failing to count secondary uses of drugs along with the primary usages which understate the returns and efficacy of the drugs.  He finds that the scientific community is reaching a consensus regarding why the failure rates of drug trials is so high and what to do about it: inadequate training and too much use of unreliable animal testing models, but the community has not reached a consensus regarding whether the anticommons lack of collaboration among universities has led to falling rates of research productivity.
     The second essay disagrees with Cockburn’s assessment that the new anticommons within universities has led to falling rates of research productivity.  Fiona Murray and Scott Stern’s essay is organized in three parts: Part 1 gives an introduction to  the issue of what happens when patents are given over what has been traditionally public domain knowledge. Part 2 builds on Stokes’s model asking what research incentives and practice might change when knowledge has both scientific and commercial applications. In part 3 the paper investigates the paper trail of dual purpose scientific discoveries that are themselves covered by IPR. By embedding the same piece of knowledge in two different institutional regimes, they embody the coverage of formal IPR over knowledge that was traditionally disclosed only through scientific publication.  (36) They arrive at less well supported conclusions than those of Cockburn, so the second essay is not a successful representation of the anticommons thesis.
     The third essay, “Wrapping It Up in a Person: The Mobility Patterns of New PhDs,” by Paula Stephan, considers the problem that midwestern universities pay a higher percentage of scientific doctorates than ultimately stay in the midwestern region, and the positive externalities of the doctoral funding is useful to the northeast and western coasts, where the doctoral graduates migrate to.  Her conclusion is that the federal government must fund these doctoral students otherwise the externalities will be lost when the midwestern states halt their own funding.  Another policy solution that Stephan doesn’t discuss is for the midwestern states to build up their own industries and provide incentives like loan reimbursement options to encourage doctoral graduates to remain in the midwestern regions. Stephan also doesn’t consider the problem of foreign graduates who don’t remain in the United States, so their externalities migrate to foreign economies.
     “Innovation Incentives for Information Goods” by Erik Brynjolfsson and Xioquan Zhang addresses the question: should creators be deprived of the rewards from their creations or should users be deprived of goods which cost nothing to produce? Their answer in relation to the pricing problems related to information goods is that a better price system should be rewarding creators based on their social contributions. (100) The pricing system that can reward creators based on their social contributions is the coupon bundling system, which will (1) aggregate a large number of relevant digital goods together and sell them as a bundle and (2) allocate the revenues from this aggregation to each of the contributors to the bundle in proportion to the value they contribute using statistical sampling and targeted coupons. This has already happened in bundles like XM Radio, Cable TV, AOL content, Rhapsody music, Consumer Reports reviews, JSTOR academic articles, and Microsoft Office software.
     The final essay, “Innovating under pressure: Towards a Science of Crisis Management,” is the most “innovative” of the five essays. It addresses the management topic of how large institutions can respond effectively to unanticipated events, i.e. shocking events like Hurricane Katrina. The essay integrates the social networking approach to modeling communication and collaboration with the flow network approach from production systems modeling to represent task processing and flow under crisis conditions.   
     With the eighth collection in this series now ready for pre-ordering and more universities creating technology transfer offices, it is likely this series will soon succeed in constructing its unified academic and policymaking audience.