Book Review
Innovation Policy and the Economy

By
Cynthia Z. Cohen

(Volume 8, edited by Adam B. Jaffe, Josh Lerner, and Scott Stern.
Chicago: University of Chicago Press, 2007)

     Who exactly are the Innovation Policymakers addressed by this series? This annual publication of the National Bureau of Economic Research (NBER) Innovation Policy and the Economy group is continuing to construct an audience for its areas of research. The five papers from the group’s April 2007 share an affinity for managerial and theoretical issues rather than for econometric methodologies. As a result, the papers pose new questions, which will require further empirical testing by researchers.    
     Many economists have argued that the pursuit of patent rights for publicly funded academic research has interfered with idea sharing in the academic community. In the first paper, Wesley M. Cohen and John P. Walsh respond to this anti-commons argument. The authors find that patents actually play a small role in the exchanges of ideas, data, materials, and methodologies among scientific researchers. Instead, researchers are able to limit access to their scientific discoveries through secrecy or not sharing research materials. The choice of whether to share research materials is grounded in both scientific and commercial incentives. To promote greater levels of scientific exchange policymakers may need to establish institutions and incentives that encourage openness and collaboration.  
     The dominant university institution for commercializing university research is the Technology Transfer Office (TTO). In “Commercializing University Innovations: Alternative Approaches,” Robert E. Litan, Lesa Mitchell, and E.J. Reedy consider the disadvantages of TTOs and pose alternative institutions that may better capture the social benefits of university research. In theory, the objectives of the TTOs are multi-faceted: they exist not simply to maximize revenue but also to distribute socially valuable research. But an emerging body of research shows that TTO officers are presented incentives biased towards the maximization of licensing revenue. TTO officers focus on technologies that can be commercialized quickly rather than research that requires a longer period in order to be commercialized or that has social value but lacks a license-fee-paying consumer base.  The authors suggest that TTOs start to increase the volume of innovations brought to market rather than devoting their energies to a few blockbuster licensing deals. Considering alternative institutions to the TTOs, the authors review a free agent model where external agents commercialize research; development of Internet brokerage systems for patentable research; and allowing faculty to commercialize their research themselves without TTO intermediaries.
Economic experiments are a useful way for buyers and sellers to learn about new products. Experiments like these can lead to changes in organizational methods that locate the economic value of new technologies.  In “Economic Experiments and Neutrality in Internet Access,” Shane Greenstein suggests that knowledge about new technologies will only be found in actual markets where demand functions, alternative pricing models, and potential competitors can be fully determined. The author finds that industry wide returns from economic experiments exceed private returns. And it was shown that the economic experiments were necessary to value creation in numerous markets. Under the economic experiments approach, regulators would give discretion to broadband carriers if they act only as carriers. However if carriers have an economic interest in the markets, a three part test is proposed that limits carrier discretion. The author finds that there need to be more incentives for investing in economic experiments for carriers and content providers.
     Patent holders currently receive rewards that exceed the patent’s social value. In “Patent Reform: Aligning Reward and Contribution,” Carl Shapiro argues that excessive rewards for these patent holders discourage innovation by others. The author proposes that a better patent system would align private returns on patents to their social value. Shapiro goes on to propose two types of reforms to accomplish alignment of private and social returns: first, the independent invention defense, in which firms that independently create a patented product be given free access to their independent invention, and second, the use of reexaminations, where improperly granted patents can be determined before they cause economic harm. Finally, the author reviews three additional reforms related to excessive private returns and social costs: limiting injunctions in selected infringement cases, reasonable royalties in components cases, and willful infringement.
     Patent pools, in which owners of intellectual property rights share patent rights with each other and third parties, have been proposed as a means of addressing the patent thicket problem. In “Public Policy toward Patent Pools,” Josh Lerner and Jean Tirole review the tradeoff in the use of patent pools: patent pools can be used to resolve stacking problems that prevent the use of innovative technologies but are also used by firms to prevent competition and support higher prices. The authors review extreme cases where patents are perfect complements or perfect substitutes for each other. Then Lerner and Tirole turn to several cases that lie between these extremes: independent licensing, where an independent patent holder retains the right to license the property outside of the pool; grant-back policies, where pool members are required to return their intellectual property if other pool members deem it necessary for the functioning of their own intellectual property; and royalty control, where policies are designed to encourage market competition between participants.
     These five essays open up new theoretical lines of inquiry to be followed up with empirical testing to determine their relevance for innovation policy. More generally, this NBER series continues to construct an audience among academics and policymakers to address a novel discipline. If we cannot currently identify the Innovation Policymakers, we soon will be able to.