The switch from patents to state-dependent prizes for technological innovation

by Hwan C. Lin, Journal of Macroeconomics

Volume 50, December 2016, Pages 193-223


Examine the intertemporal bounty (IB) system as an alternative to patents.
The IB system rewards innovation with a bounty claim to state-dependent prizes (called “intertemporal bounties”) over time.
Intertemporal bounties are funded by factor income taxes (labor & capital). The labor income tax is non-distortionary and the capital income tax is distortionary in the model.
Solve the dynamical system of the IB-regime economy when patents are replaced with bounty claims.
Evaluate the steady-state welfare effect and the intertemporal welfare effect, under labor income taxation and capital income taxation, respectively.


The intertemporal-bounty system is proposed to replace patents by requesting innovators to place innovations in the public domain in exchange for bounty claims. This eliminates monopoly distortions. As tradeable assets, bounty claims can earn intertemporal bounties or state-dependent prizes, conditioned on time-varying market sales from bountiable goods multiplied by a time-invariant bounty rate. Creative destruction can make some bounty claims worthless, however. Government collects taxes to pay bounties. The switch from patents to intertemporal bounties is simulated using an R&D-based growth model calibrated to the U.S. economy. Funded by a tax on labor income, the regime switch can generate a consumption-equivalent welfare gain of 7%. This is considered the maximum opportunity cost to keep the U.S. patent system, as the labor income tax is non-distortionary in the model. Funded by the distortionary capital income tax, the regime switch can remain welfare-improving, provided the bounty rate is set appropriately.


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