Rewarding Innovation Efficiently: The Case for Exclusive Rights

We compare strong and weak IP rights using Kaplow-like ratio tests, which relate the social costs (in terms of deadweight losses) and benefits (in terms of incentives to innovate) of alternative forms of protection. We investigate firms’ incentives in an innovation race where two or more firms that target the same innovation race to discover first, and show how the standard Kaplow test should be corrected so as to account for the adverse effect on the incentives to innovate of the “consolation prize” netted under nonexclusive rights by the loser. We conclude that the policy prescriptions obtained by the previous literature need to be qualified.