Rewards versus Intellectual Property Rights.” Discussion Paper No. 246

This paper compares reward systems to intellectual property rights (patents and copyrights). Under a reward system, innovators are paid for innovations directly by the government (possibly on the basis of sales), and innovations pass immediately into the public domain. Thus, reward systems engender incentives to innovate without creating the monopoly power of intellectual property rights. But a principal difficulty with rewards is the information required for their determination. We conclude in our model that intellectual property rights do not possess a fundamental social advantage over reward systems and that an optional reward system—under which innovators choose between rewards and intellectual property rights—is superior to intellectual property rights. I