Prizes And Patents: Using Market Signals To Provide Incentives For Innovations

Date Added: Oct 2009
Format: PDF

Innovative activities have public good characteristics in the sense that the cost of producing, say, the first unit of a new good is high compared to the cost of producing subsequent units. Moreover, knowledge of how to produce subsequent units is often widely known once the innovation has occurred and is, therefore, non-rivalrous. The main question addressed in this paper is whether mechanisms can be found which exploit market information to provide appropriate incentives for innovation. The authors consider environments in which agents other than innovator receive the signals about the quality of innovation. For example, information from innovators, competitors, and the marketplace can be used to reward the innovator.