2. Investing in knowledge

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1 Some slides adopted from Suzanne Scotchmer Contents May Be Used Pursuant to Attribution Noncommercial No Derivative Works 1.0 Generic nd nc/1.0/ /li /b /1 1

2 Who Funds R&D? Is it the private sector that matters? Which countries spend more on R&D? How much money does the government give the private sector for R&D? Universities? How much money does the private sector give to universities? How much money goes for defense related R&D? What is the funding for? 2

3 Big difference between public and private R&D: Private R&D applied Public R&Dbasic Private R&D maximizes profits Public R&D maximizes welfare (cc) Ulrich Kaiser 3

4 Oddityofpublicly financed R&D: Bayh Doyle act (1980) patents are assigned to public research institutions in the US Europe followed suit Technology transfer offices are all over the place (also at UZH) Inwhat way has the incentive system changed? Why was the act installed in the first place? (cc) Ulrich Kaiser 4

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7 Nondefense Governm ent Spending on R&D Pe ercentage Ye a r In decreasing order of terminal ( 1998) v a lu e s : J a p a n, G e r m a n y, U.S. ( in b o ld ), F ra n c e, U.K., C a n a d a, Ita ly 7

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10 R&D spending, Percentages of total Perce entage Dark blue = public, Light blue=private 10

11 Y e a r Top: US Funding to industry. Bottom: US Funding to universities 11

12 Federal Industrial Total Universities other State/Local Intramural Firms FFRDC Colleges nonprofit Government Foreign Total $83,609 R&D Budget 23.67% 40.17% 8.88% 21.43% 5.01% 0.49% 0.34% $36,462 Defense 23.66% 69.43% 2.06% 4.21% 0.42% 0.03% 03% 0.18% $19,463 HHS 19.90% 5.92% 1.32% 56.47% 15.40% 0.68% 0.31% $9,966 NASA 25.16% 48.67% 13.19% 7.90% 3.86% 0.11% 1.11% $7,656 Energy 11.38% 15.32% 63.05% 9.43% 0.78% 0.04% 0.01% $3,431 NSF 1.78% 3.91% 6.73% 81.26% 5.63% 0.20% 0.50% $1,892 Agriculture 72.09% 0.58% 0.00% 26.48% 0.48% 0.16% 0.21% $1,163 Commerce 69.82% 16.08% 0.00% 10.92% 2.06% 1.03% 0.00% $882 Interior 88.06% 3.06% 0.00% 7.74% 0.16% 0.81% 0.32% $672 DOT 32.77% 36.96% 0.68% 6.92% 2.04% 20.52% 0.11% $620 EPA 18.60% 47.62% 0.00% 22.62% 9.38% 1.64% 0.30% $1,401 Others 51.25% 7.07% 2.50% 14.78% 20.41% 2.50% 1.57% Source: NSF, Science and Engineering i Indicators 2002, Table

13 Examples for public funds Packet switching technology of the Internet US DOD CERN European states Biotech basis UC Berkeley and San Franscico Digital computer U Pennsylvania Laser Columbia U (cc) Ulrich Kaiser 13

14 Research incentives Public publish in journals (or perish); ih) reputation; tti nowadays also incentives to attract funding Private patent (or perish) Outcome Average university licensing offices receives 69invention disclosures Applies for ½ for a patent Universities apply for four times more patents as private industry Pressure from university leadership to go for profits instead of dissemination Big bang: Harvard/Hoechst USD70 mio. deal in 1984; idea: leverage ideas and expertise in return for funding (cc) Ulrich Kaiser 14

15 Public/private Grantee may restrict communication between colleagues 7% of university funding is private Public funds may subsidize private funds as funding goes to same institution/even same lab Example: Sandoz wanted to pay USD 300 mio. for 100% of Scripps Research Institute t (San Diego); Scripps is an NIH funded d research organization; government asked to scale back (what patents will Sandoz pick?) Start up activity by universities see UZH 175 years yearbook for examples; more prominent examples are Genentech and Chiron (UC) Licensing offices provide IPR in return for fees (cc) Ulrich Kaiser 15

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17 cost, funds, profit vπt+s s+m vπt s m v v value s= governmental subsidy, m=firms matching requirement (invest.), v= social value, πvt=profit, π= firms share of v, T= patent length 17

18 The government grant process: funding Inventors instead of Inventions? Why might you expect it not to work? Free riding, etc. Why does no one cheat? λ Self selection andfunding; value ofideas in period t: ( ρ c ) Discounted value of future grants: (1 + r) t λ 1 λ ( ρ c) = λ ( ρ c) ( c) (1 t t = ρ t = 1 + r) t = 1 (1 + r ) r Invest if the value of cheating, c, is less than value of future grants (selfselection mechanism of the high fertility (the best) researchers) λ c ( ρ c + ) ) t (1 r t= 1 + ) c λ λ + r ρ 18

19 Questions about grants: What if you are a high cost researcher? What if you are a low fertility (low λ)? Will the government have to over pay? 19

20 2.2 How Intellectual Property Works The (public goods) nature of knowledge & information goods Longitude Example: What is the lesson? What do these have in common: Knowledge that DNA is a double helix Software Digital music Public Goods: Nonrivalness: High cost to create; zero cost to distribute or use. What is the efficiency conclusion? Nonexcludability: If the good is nonexcludable, IP will not work!! 20

21 2.2 How Intellectual Property Works The (public goods) nature of knowledge & information goods Private Goods: The competitive i market is efficient i price = marginal cost: Why is that efficient? What if a template must be developed? 21

22 2.2 How Intellectual Property Works What does IP do? IP creates (as a legal l matter) excludability. Does this solve the public goods problem? What about nonrivalness? IP provides at least a weak efficiency test as to whether the value of investment exceeds cost IP does a bad job of delegation It does not privilege the more efficient firms It does not regulate entry and duplication IP leads to deadweight loss IP concentrates costs among the users 22

23 2.2 How Intellectual Property Works Intellectual Property: Compared to what? Public Sponsorship? 1960 s and 1970 s Super Sonic Transport Public support for private enterprise. Napoleon: Food preservation Invention for the public good NIH, NSF: Researcher initiated projects NASA: Targeted government objectives 23

24 2.2 How Intellectual Property Works Prizes Targeted versus blue sky research Lyons (blue sky) Napoleon s food preservation (targeted) Simple model: Invest in a blue sky idea (v,c)? Why not make the price depend on cost? Why doesn t tthe prize giver i get ripped off? Needs to make the price depend on value The role of IP as a background for prizes: Photography Hyatt and celluoid 24

25 2.2 How Intellectual Property Works Simple Prizes and Scarce Ideas A single inventors has an idea. He must decide whether h to invest in it, and we want him to make the right decision. An idea is a pair (v,c) where c is the cost of making the idea an innovation and v is per period profit. Investment is efficient if (1/r) v > c. If we were going to use prizes instead, what value of prize should we set? How does the optimal prize relate to v? to c? How does this depend on what is observable? Verifiable? 25

26 2.2 How Intellectual Property Works Prizes: Can the prize be linked to value? How should the value of the prize be chosen? How was the prize chosen in the case of longitude? Canning? The Lyonnaise silk weavers? Would it be better to link the prize to cost? What problems do patents and prize have in common? 26