Promoting Progress: Incentivizing Technology Risk-Taking and Investment with Limited Exclusive Patent Rights

Abstract

Analytical economic evidence shows that a strong patent system provides incentives for investing in technology and encourages competition that tends to promote progress in the long run.Critics of patents look to short run exclusive rights that suggest an “anticommons” that blocks competition, but these arguments are limited. Patent critics ignore the ex ante risks and costs of scientific discovery and technological invention. The article examines the microeconomic arguments for investment in technology and examines the costs and risks of technology investment. The article applies real options analysis (ROA) to modeling of risk scenarios. The article also examines transaction costs to determine that costs are a significant factor in technology investment justifications. The increased risks increase the costs of capital. With increased uncertainty of the patent grant, the costs of capital increase beyond an optimal rate of investment, with high risk inventions at the periphery not sustainable.The article argues for strong patent rights that protect ex ante investment in risky technologies, maximizes competition between multiple technologies and promotes progress in the long run.