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Innovation is a public good. As with other public goods, it is expected to be underproduced if only private incentives are present. Therefore, the law strives to encourage innovation via an array of stimulus mechanisms. The law offers three main mechanisms: intellectual property (IP), cash transfers—mainly prizes and grants—and tax incentives. Vast literature analyzes and compares these innovation stimuli in search of the optimal mix to boost innovation. Yet a key problem is largely overlooked: together, the existing stimuli do not cover the lion’s share of the innovation lifecycle. At the beginning of the innovation process, companies can win grants or prizes to cover research & development (R&D) expenses. When the company is already selling, it can enjoy IP payoffs and tax credits. In between, no targeted stimuli exist. This is an incongruity because most innovative endeavors struggle neither in the R&D phase nor at the sales stage. In particular, for startups in the high-tech sector, it is precisely the phases between R&D and sales that prove fatal. This phenomenon is so well-known that the market has created a nickname for it: “the valley of death.” The gap in funding yields high costs. First, underfunding yields an exorbitant startup failure rate, which represents innovation loss and harms the incentive to engage in innovation. Second, the dearth of funding produces inferior innovation and imposes competitive harm against well-funded incumbents. Third, distributive concerns arise because the current regime disproportionately affects entrepreneurs with less access to capital on the free market. This Article considers three main ways to alleviate these concerns. The first way is to “stretch” the existing stimuli to cover the post-R&D-premarket stage of companies. The second possibility is to improve the private market for startup funding. Finally, a third solution consists of discrete policies to address the costs that the stimulus gap imposes without directlyaddressing this gap. For example, it is possible to conceive of ways to tackle distributive concerns of startup funding. This Article makes at least three novel contributions to the literature: first, it analyzes the gap in inducement tools in the innovation lifecycle, which is largely overlooked. Second, it explores the inefficiencies of stimuli shortages in terms of innovation policy. Finally, this Article takes the first step in exploring potential solutions. [ABSTRACT FROM AUTHOR]

Economists generally agree that innovation is important to economic growth and that government support for innovation is necessary. Historically, the U.S. government has supported innovation in a variety of ways: (1) a strong legal system for patents; (2) direct support through research performed by government agencies, grants, loans, and loan guarantees; and (3) indirect support through various tax incentives for private firms. In recent years, however, we have seen a weakening of the U.S. patent system, a decline in direct funding of research, and a weakening of tax policy tools used to encourage new innovation. These disruptive changes threaten the future of innovation in the United States, potentially driving innovation activities offshore to Europe and China. This Article concludes that the current innovation crisis demands changes to both the patent and tax systems in order to instill confidence in the innovation landscape. [ABSTRACT FROM AUTHOR]

In combinatorial models of innovations, new technologies are built from combinations of pre-existing technological components. Researchers learn which components work well together by observing previously successful combinations and the pool of ideas can be ‘fished out’, i.e. exhausted, if it is not ‘restocked’ by the discovery of novel connections. We first show US patents have made increasingly less novel connections among technological constituents since the 1950s, and that the number of technological fields to which these connections are applicable has stopped growing since the 1980s. We then estimate the parameters of an ideas production function, and find parameter estimates consistent with technology fields being fished out if not continually restocked by the discovery of novel connections between technological components. We use the ideas production function to estimate the number of new patent applications induced by each patent granted between 1926 and 2001, and show this number has trended downward since the 1940s. [ABSTRACT FROM AUTHOR]

Mandates, which establish minimum use quotas for certain goods, are becoming increasingly popular policy tools to promote renewable energy use. In addition to mitigating the pollution externality of conventional energy, clean energy mandates have the goal of promoting research and development (R&D) investments in renewable energy technology. But how well do mandates perform as innovation incentives? To address this question, we develop a partial equilibrium model to examine the R&D incentives induced by a mandate, and compare this policy to two benchmark situations: laissez faire and a carbon tax. Innovation is stochastic and the model permits an endogenous number of multiple innovators. We present both analytical results and conclusions based on numerical simulations. We find that the optimal mandate is larger than it would be without the prospect of innovation, that neglecting the outlook for innovation significantly reduces welfare, and that the optimal mandate is more sensitive to assumptions about the innovation process than an optimal carbon tax. Furthermore, we find that mandates create relatively strong incentives for R&D investment in lowquality innovations, but relatively weak incentives to invest in high-quality innovations. We also rank policies by expected welfare. An optimal carbon tax has higher expected welfare than an optimal mandate, and both have higher expected welfare than laissez faire. Moreover, in our endogenous innovation setting, a stronger result obtains: a simple carbon tax equal to the damage from pollution (unadjusted for the prospect of innovation) has higher expected welfare than an optimal mandate. [ABSTRACT FROM AUTHOR]

Innovation is essential for sustaining growth and economic development in a world that faces population increase, natural resource depletion, and environmental challenges. Incentives play a critical role in innovation because the required research and development activities are costly, and the resulting knowledge has the attributes of a public good. This paper discusses the economics of institutions and policies meant to provide incentives for research and innovation, and focuses on intellectual property rights, specifically patents, contracted research (for example grants), and innovation prizes. The main economic implications of these institutions are discussed, with particular attention paid to open questions and recent contributions. [ABSTRACT FROM AUTHOR]