The Volokh Conspiracy - Patent Reform:

The major theme of my new book is that we need better incentive schemes for every segment of society: congressmen and presidents, firefighters and police officers, judges and juries, prosecutors and defense attorneys, philanderers and promisekeepers. The book offers dozens of proposals for radical reform; this week I'll blog about a few of my favorites.

One of the very best ideas comes from Harvard's Michael Kremer, who proposes to overhaul the patent system. The problem with patents is that they reward good behavior (that is, inventiveness) with a license for bad behavior (that is, monopoly pricing). It's rather like rewarding good samaritans with licenses to drive drunk. Surely there's a better way.

Kremer's proposal is essentially this: When you design a better mousetrap, we grant you a patent. The next day, the government purchases the patent for a fair market price and puts it in the public domain. The inventor gets his reward, and the rest of us get to buy goods at competitive prices. We pay through the tax system only what the inventor would have extracted from us anyway, and we get the additional benefits of competition: more mousetraps are built, and more inventors can start piggybacking on the idea.

The sticking point is determining that "fair market price". But Kremer has solved that problem: First we grant the patent. Then we auction the patent to the highest bidder. As soon as the auction ends, the man from the government arrives and flips a coin. If the coin comes up heads, the auction winner completes his purchase; if it comes up tails, the government buys the patent for the amount of the winning bid. Bidders have every incentive to bid judiciously because the coin sometimes comes up heads. But this way, half of all patents end up in the public domain, which is halfway toward solving the problem.

That's the naive version of the plan. In the sophisticated version, the man from the government flips a weighted coin, so that he wins 90% of the time. (You can't go all the way to 100% or bidders will have no incentive to perform their due diligence.)

What about collusion in the auctions? Kremer's solved that too. Read his paper or my book for the details.

The benefits from Kremer's plan would be so phenomenally huge (think about having 90% of all prescription drugs sold at competitive prices) that I cannot imagine why it wasn't adopted the day he proposed it. I just don't see the downside.

So much for the patent system. Tomorrow I'll tell you how to reform politics.

	[Steven Landsburg, guest-blogging, April 23, 2007 at 7:02am] Trackbacks Patent Reform: The major theme of my new book is that we need better incentive schemes for every segment of society: congressmen and presidents, firefighters and police officers, judges and juries, prosecutors and defense attorneys, philanderers and promisekeepers. The book offers dozens of proposals for radical reform; this week I'll blog about a few of my favorites. One of the very best ideas comes from Harvard's Michael Kremer, who proposes to overhaul the patent system. The problem with patents is that they reward good behavior (that is, inventiveness) with a license for bad behavior (that is, monopoly pricing). It's rather like rewarding good samaritans with licenses to drive drunk. Surely there's a better way. Kremer's proposal is essentially this: When you design a better mousetrap, we grant you a patent. The next day, the government purchases the patent for a fair market price and puts it in the public domain. The inventor gets his reward, and the rest of us get to buy goods at competitive prices. We pay through the tax system only what the inventor would have extracted from us anyway, and we get the additional benefits of competition: more mousetraps are built, and more inventors can start piggybacking on the idea. The sticking point is determining that "fair market price". But Kremer has solved that problem: First we grant the patent. Then we auction the patent to the highest bidder. As soon as the auction ends, the man from the government arrives and flips a coin. If the coin comes up heads, the auction winner completes his purchase; if it comes up tails, the government buys the patent for the amount of the winning bid. Bidders have every incentive to bid judiciously because the coin sometimes comes up heads. But this way, half of all patents end up in the public domain, which is halfway toward solving the problem. That's the naive version of the plan. In the sophisticated version, the man from the government flips a weighted coin, so that he wins 90% of the time. (You can't go all the way to 100% or bidders will have no incentive to perform their due diligence.) What about collusion in the auctions? Kremer's solved that too. Read his paper or my book for the details. The benefits from Kremer's plan would be so phenomenally huge (think about having 90% of all prescription drugs sold at competitive prices) that I cannot imagine why it wasn't adopted the day he proposed it. I just don't see the downside. So much for the patent system. Tomorrow I'll tell you how to reform politics.