Property as Process: How Innovation Markets Select Innovation Regimes

Abstract

It is commonly asserted that innovation markets suffer from excessive intellectual property protections, which in turn stifle output. But empirical inquiries can neither confirm nor deny this assertion. Under the "agnostic" assumption that we cannot assess directly whether intellectual-property coverage is excessive, an alternative query is proposed: can the market assess if any "propertization outcome" is excessive and then undertake actions to yield a socially preferable outcome? Grounded in the "bottom up" methodology of new institutional economics, this process-based approach takes the view that innovator populations make rent-seeking investments that continuously "select" among a range of "innovation regimes" that trade off securing innovation gains (which tends to demand more property) against reducing transaction costs and associated innovation losses (which tends to demand less). If we can identify the conditions under which privately-interested investments in lobbying, enforcement, and transactional arrangements are likely to yield socially-interested propertization outcomes, then the underlying datum at issue - whether there is "too much" intellectual property - can be determined indirectly at some reasonable degree of approximation. This approach identifies a "property trap" effect where, under high coordination-cost conditions, the regime selection mechanism is prone to fail: litigation risk and associated transaction-cost burdens drive innovators to move "too fast" to implement a state-provided property regime. Conversely, under low coordination-cost conditions, the regime selection mechanism is prone to succeed: adversely-affected entities that rely substantially on outside sources for innovation inputs have incentives to undertake actions that weaken property-rights coverage, including constrained enforcement, forming cooperative arrangements, or even forfeiting intellectual-property assets to the public domain. Counterintuitively, these relationships imply that large firms that rely substantially on outside sources for innovation inputs tend to have the strongest incentives and capacities to take actions that correct overpropertization outcomes. Preliminary evidence is drawn from the semiconductor, financial-services and information-technology industries.