Patent Buy-Outs: A Mechanism for Encouraging Innovation

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In 1839, the French government purchased the patent on the Daguerreotype process and" placed it in the public domain. This paper examines a mechanism under which governments" would use an auction to estimate the private value of patents and then offer to buy out patents at" this private value, times a fixed markup. The markup would correspond to the estimated typical" ratio of the social and private values of inventions -- perhaps two. Most patents purchased would" be placed in the public domain, but in order to induce bidders to reveal their valuations patents would be sold to the highest bidder. Such patent buy-outs could eliminate monopoly" price distortions and incentives for wasteful reverse engineering, while raising private incentives" for original research closer to their social value. However, patent buy-outs are potentially" vulnerable to collusion. Patent buy-outs may be particularly appropriate for pharmaceuticals."

Published: Quarterly Journal of Economics (November 1998): 1137-1167.

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