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Contemporary Views on Economics of Patents  

Shubha Ghosh

A patent is a legal right to exclude granted by the state to the inventor of a novel and useful invention. Much legal ink has been spilled on the meaning of these terms. “Novel” means that the invention has not been anticipated in the art prior to its creation by the inventor. “Useful” means that the invention has a practical application. The words “inventor” and “invention” are also legal terms of art. An invention is a work that advances a particular field, moving practitioners forward not simply through accretions of knowledge but through concrete implementations. An inventor is someone who contributes to an invention either as an individual or as part of a team. The exclusive right, finally, is not granted gratuitously. The inventor must apply and go through a review process for the invention. Furthermore, a price for the patent being granted is full, clear disclosure by the inventor of how to practice the invention. The public can use this disclosure once the patent expires or through a license during the duration of the patent. These institutional details are common features of all patent systems. What is interesting is the economic justification for patents. As a property right, a patent resolves certain externality problems that arise in markets for knowledge. The establishment of property rights allows for trade in the invention and the dissemination of knowledge. However, the economic case for property rights is made complex because of the institutional need to apply for a patent. While in theory, patent grants could be automatic, inventions must meet certain standards for the grant to be justified. These procedural hurdles create possibilities for gamesmanship in how property rights are allocated. Furthermore, even if granted correctly, property rights can become murky because of the problems of enforcement through litigation. Courts must determine when an invention has been used, made, or sold without permission by a third party in violation of the rights of the patent owner. This legal process can lead to gamesmanship as patent owners try to force settlements from alleged infringers. Meanwhile, third parties may act opportunistically to take advantage of the uncertain boundaries of patent rights and engage in undetectable infringement. Exacerbating these tendencies are the difficulties in determining damages and the possibility of injunctive relief. Some caution against these criticisms through the observation that most patents are not enforced. In fact, most granted patents turn out to be worthless, when gauged in commercial value. But worthless patents still have potential litigation value. While a patent owner might view a worthless patent as a sunk cost, there is incentive to recoup investment through the sale of worthless patents to parties willing to assume the risk of litigation. Hence the phenomenon of “trolling,” or the rise of non-practicing entities, troubles the patent landscape. This phenomenon gives rise to concerns with the anticompetitive uses of patents, demonstrating the need for some limitations on patent enforcement. With all the policy concerns arising from patents, it is no surprise that patent law has been ripe for reform. Economic analysis can inform these reform efforts by identifying ways in which patents fail to create a vibrant market for inventions. Appreciation of the political economy of patents invites a rich academic and policy debate over the direction of patent law.


Variations in the Adoption of Healthcare Innovation: A Literature Review  

Marisa Miraldo, Katharina Hauck, Antoine Vernet, and Ana Wheelock

Major medical innovations have greatly increased the efficacy of treatments, improved patient outcomes, and often reduced the cost of medical care. However, innovations do not diffuse uniformly across and within health systems. Due to the high complexity of medical treatment decisions, variations in clinical practice are inherent to healthcare delivery, regardless of technological advances, new ways of working, funding, and burden of disease. In this article we conduct a narrative literature review to identify and discuss peer-reviewed articles presenting a theoretical framework or empirical evidence of the factors associated with the adoption of innovation and clinical practice. We find that variation in innovation adoption and medical practice is associated with multiple factors. First, patients’ characteristics, including medical needs and genetic factors, can crucially affect clinical outcomes and the efficacy of treatments. Moreover, differences in patients’ preferences can be an important source of variation. Medical treatments may need to take such patient characteristics into account if they are to deliver optimal outcomes, and consequently, resulting practice variations should be considered warranted and in the best interests of patients. However, socioeconomic or demographic characteristics, such as ethnicity, income, or gender are often not considered legitimate grounds for differential treatment. Second, physician characteristics—such as socioeconomic profile, training, and work-related characteristics—are equally an influential component of practice variation. In particular, so-called “practice style” and physicians’ attitudes toward risk and innovation adoption are considered a major source of practice variation, but have proven difficult to investigate empirically. Lastly, features of healthcare systems—notably, public coverage of healthcare expenditure, cost-based reimbursement of providers, and service-delivery organization, are generally associated with higher utilization rates and adoption of innovation. Research shows some successful strategies aimed at reducing variation in medical decision-making, such as the use of decision aids, data feedback, benchmarking, clinical practice guidelines, blinded report cards, and pay for performance. But despite these advances, there is uneven diffusion of new technologies and procedures, with potentially severe adverse efficiency and equity implications.


The Protection of Intellectual Property in the Global Economy  

Kamal Saggi and Olena Ivus

Longstanding international frictions over uneven levels of protection granted to intellectual property rights (IPR) in different parts of the world culminated in 1995 in the form of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)—a multilateral trade agreement that all member countries of the World Trade Organization (WTO) are obligated to follow. This landmark agreement was controversial from the start since it required countries with dramatically different economic and technological capabilities to abide by essentially the same rules and regulations with respect to IPRs, with some temporary leeway granted to developing and least developed countries. As one might expect, developing countries objected to the agreement on philosophical and practical grounds while developed countries, especially the United States, championed it strongly. Over the years, a vast and rich economics literature has emerged that helps understand this international divide. More specifically, several fundamental issues related to the protection of IPRs in the global economy have been addressed: are IPRs trade-related? Do the incentives for patent protection of an open economy differ from those of a closed one and, if so, why? What is the rationale for international coordination over national patent policies? Why do developed and developing countries have such radically different views regarding the protection of IPRs? What is the level of empirical support underlying the major arguments for and against the TRIPS-mandated strengthening of IPRs in the world economy? Can the core obligations of the TRIPS Agreement as well as the flexibilities it contains be justified on the basis of economic logic? We discuss the key conclusions that can be drawn from decades of rigorous theoretical and empirical research and also offer some suggestions for future work.


The Economics of Innovation, Knowledge Diffusion, and Globalization  

Nelson Lind and Natalia Ramondo

A recent body of literature on quantitative general equilibrium models links the creation and diffusion of knowledge and technology to openness to international trade and to the activity of multinational firms. The unifying theme of this literature is methodological: productivities are Fréchet random variables and arise from Poisson innovation and diffusion processes for ideas. The main advantage of this modeling strategy is that it delivers closed-form solutions for key endogenous variables that have a direct counterpart in the data (e.g., prices, trade flows). This tractability makes the connection between theory and data transparent, helps clarify the determinants of the gains from openness, and facilitates the calculation of counterfactual equilibria.


Creative Destruction, Technology Disruption, and Growth  

Thomas Clarke

The origins of modern technological change provide the context necessary to understand present-day technological transformation, to investigate the impact of the new digital technologies, and to examine the phenomenon of digital disruption of established industries and occupations. How these contemporary technologies will transform industries and institutions, or serve to create new industries and institutions, will unfold in time. The implications of the relationships between these pervasive new forms of digital transformation and the accompanying new business models, business strategies, innovation, and capabilities are being worked through at global, national, corporate, and local levels. Whatever the technological future holds it will be defined by continual adaptation, perpetual innovation, and the search for new potential. Presently, the world is experiencing the impact of waves of innovation created by the rapid advance of digital networks, software, and information and communication technology systems that have transformed workplaces, cities, and whole economies. These digital technologies are converging and coalescing into intelligent technology systems that facilitate and structure our lives. Through creative destruction, digital technologies fundamentally challenge existing routines, capabilities, and structures by which organizations presently operate, adapt, and innovate. In turn, digital technologies stimulate a higher rate of both technological and business model innovation, moving from producer innovation toward more user-collaborative and open-collaborative innovation. However, as dominant global platform technologies emerge, some impending dilemmas associated with the concentration and monopolization of digital markets become salient. The extent of the contribution made by digital transformation to economic growth and environmental sustainability requires a critical appraisal.


Religiosity and Development  

Jeanet Sinding Bentzen

Economics of religion is the application of economic methods to the study of causes and consequences of religion. Ever since Max Weber set forth his theory of the Protestant ethic, social scientists have compared socioeconomic differences across Protestants and Catholics, Muslims, and Christians, and more recently across different intensities of religiosity. Religiosity refers to an individual’s degree of religious attendance and strength of beliefs. Religiosity rises with a growing demand for religion resulting from adversity and insecurity or a surging supply of religion stemming from increasing numbers of religious organizations, for instance. Religiosity has fallen in some Western countries since the mid-20th century, but has strengthened in several other societies around the world. Religion is a multidimensional concept, and religiosity has multiple impacts on socioeconomic outcomes, depending on the dimension observed. Religion covers public religious activities such as church attendance, which involves exposure to religious doctrines and to fellow believers, potentially strengthening social capital and trust among believers. Religious doctrines teach belief in supernatural beings, but also social views on hard work, refraining from deviant activities, and adherence to traditional norms. These norms and social views are sometimes orthogonal to the general tendency of modernization, and religion may contribute to the rising polarization on social issues regarding abortion, LGBT rights, women, and immigration. These norms and social views are again potentially in conflict with science and innovation, incentivizing some religious authorities to curb scientific progress. Further, religion encompasses private religious activities such as prayer and the particular religious beliefs, which may provide comfort and buffering against stressful events. At the same time, rulers may exploit the existence of belief in higher powers for political purposes. Empirical research supports these predictions. Consequences of higher religiosity include more emphasis on traditional values such as traditional gender norms and attitudes against homosexuality, lower rates of technical education, restrictions on science and democracy, rising polarization and conflict, and lower average incomes. Positive consequences of religiosity include improved health and depression rates, crime reduction, increased happiness, higher prosociality among believers, and consumption and well-being levels that are less sensitive to shocks.


The Contribution of Vocational Education and Training to Innovation and Growth  

Uschi Backes-Gellner and Patrick Lehnert

Despite the common view that innovation requires academically educated workers, some countries that strongly emphasize vocational education and training (VET) in their education systems—such as Switzerland and Germany—are highly competitive internationally in terms of innovation. These countries have dual VET programs, that is, upper-secondary-level apprenticeship programs, that combine about three quarters of workplace training with about one quarter of vocational schooling, and design them in such a way that their graduates (i.e., dual apprenticeship-graduates) play crucial roles in innovation processes. Regular updates of VET curricula incorporate the latest technological developments into these curricula, thereby ensuring that dual apprenticeship-graduates possess up-to-date, high-level skills in their chosen occupation. This process allows these graduates to contribute to innovation in firms. Moreover, these graduates acquire broad sets of technical and soft skills that enhance their job mobility and flexibility. Therefore, conventional wisdom notwithstanding, dual apprenticeship-graduates in such countries not only have broad skill sets that accelerate innovation in firms, but also willingly participate in innovation because of their high flexibility and employability. Moreover, Switzerland and Germany have tertiary-level VET institutions that foster innovation. These are universities of applied sciences (UASs), which teach and conduct applied research, thereby helping build a bridge between different types of knowledge (vocational and academic). UAS students have prior vocational knowledge through their dual apprenticeship and acquire applied research skills from UAS professors who usually have both work experience and a doctoral degree from an academic university. Thus UAS graduates combine sound occupational knowledge with applied research knowledge inspired by input from the academic research frontier and from practical research and development (R & D) in firms. Firms employ UAS graduates with their knowledge combination as an important input for R & D. Consequently, regions with a UAS have higher levels of innovation than regions without one. This effect is particularly strong for regions outside major innovation centers and for regions with larger percentages of smaller firms.


Knowledge Spillovers, Trade, and Foreign Direct Investment  

Wolfgang Keller

This article explores knowledge spillovers, positive externalities that augment the information set of an economic agent, and reviews the evidence on such spillovers in the context of international economic transactions. The entry discusses trade channels of knowledge transfer associated with purchases from abroad (imports) and sales to abroad (exports). Another focus is on the foreign direct investment (FDI) channel through purchases from abroad (inward FDI) and sales to abroad (outward FDI). The entry also distinguishes knowledge flows from foreign to domestic agents and from domestic to foreign agents. The entry underlines the importance of empirical methodology and data characteristics that determine the quality of econometric identification. Even though spillovers are by their very nature—as externalities—difficult to identify, over recent decades a number of advances have produced robust evidence that both trade and foreign direct investment lead to sizable knowledge spillovers. These advances have been both conceptual as well as in the areas of empirical methodology and new data.


Geographic Proximity and Science Parks  

Albert N. Link and John T. Scott

Science parks, also called research parks, technology parks, or technopolis infrastructures, have increased rapidly in number as many countries have adopted the approach of bringing research-based organizations together in a park. A science park’s cluster of research and technology-based organizations is often located on or near a university campus. The juxtaposition of ongoing research of both the university and the park tenants creates a two-way flow of knowledge; knowledge is transferred between the university and firms, and all parties develop knowledge more effectively because of their symbiotic relationship. Theory and evidence support the belief that the geographic proximity provided to the participating organizations by a science park creates a dynamic cluster that accelerates economic growth and international competitiveness through the innovation-enabling exchanges of knowledge and the transfer of technologies. The process of creating innovations is more efficient because of the agglomeration of research and technology-based firms on or near a university campus. The proximity of a park to multiple sources of knowledge provides greater opportunities for the creation and acquisition of knowledge, especially tacit knowledge, and the geographic proximity therefore reduces the search and acquisition costs for that knowledge. The clustering of multiple research and technology-based organizations within a park enables knowledge spillovers, and with greater productivity from research resources and lower costs, prices for new technologies can be lower, stimulating their use and regional development and growth. In addition to the clustering of the organizations within a park, the geographic proximity of universities affiliated with a park matters too. Evidence shows that a park’s employment growth is greater, other things being the same, when its affiliated university is geographically closer, although evidence suggests that effect has lessened in the 21st century because of the information and communications technology revolution. Further stimulating regional growth, university spin-off companies are more prevalent in a park when it is geographically closer to the affiliated university. The two-way flow of knowledge enabled by clusters of research and technology-based firms in science parks benefits firms located on the park and the affiliated universities. Understanding the mechanisms by which the innovative performance of research and technology-based organizations is increased by their geographic proximity in a science park is important for formulating public and private sector policies toward park formations because successful national innovation systems require the two-way knowledge flow, among firms in a park and between firms and universities, that is fostered by the science park infrastructure.


Guilds and the Economy  

Sheilagh Ogilvie

Guilds ruled many European crafts and trades from the Middle Ages to the Industrial Revolution. Each guild regulated entry to its occupation, requiring any practitioner to become a guild member and then limiting admission to the guild. Guilds intervened in the markets for their members’ products, striving to keep prices high, limit output, suppress competition, and block innovations that might disrupt the status quo. Guilds also acted in input markets, seeking to control access to raw materials, keep wages low, hinder employers from competing for workers, and prevent workers from agitating for better conditions. Guilds treated women particularly severely, usually excluding them from apprenticeship and forbidding any female other than a guild member’s widow from running a workshop. Guilds invested large sums in lobbying governments and political elites to grant, maintain, and extend these privileges. Guilds had the potential to compensate for their cartelistic activities by creating countervailing benefits. Guild quality certification was one possible solution to information asymmetries between producers and consumers, which could have made markets work better. Guild apprenticeship had the potential to solve imperfections in markets for skilled training, and thus to encourage human capital investment. The cartel profits generated by guilds could in theory have encouraged technological innovation by enabling guild masters to appropriate more of the social benefits of their innovations, while guild journeymanship and spatial clustering could diffuse new technical knowledge. A rich scholarship on European guilds makes it possible to assess the degree to which guilds created such benefits, outweighing the harm they caused. After about 1500, guild strength diverged across Europe, declining gradually in Flanders, the Netherlands, and England, surviving in France and Italy, and intensifying across large tracts of Iberia, Scandinavia, and the German-speaking lands. The activities of guilds contributed to variations across Europe in economic performance, urban growth, and inequality. Guilds interacted significantly with both markets and states, which helps explain why European economies diverged in the crucial centuries before industrialization.


Effectiveness and Availability of Treatment for Substance Use Disorders  

Dominic Hodgkin and Hilary S. Connery

Drug and alcohol use disorders, also called substance use disorders (SUD), are among the major health problems facing many countries, contributing a substantial burden in terms of mortality, morbidity, and economic impact. A considerable body of research is dedicated to reducing the social and individual burden of SUD. One major focus of research has been the effectiveness of treatment for SUD, with studies examining both medication and behavioral treatments using randomized, controlled clinical trials. For opioid use disorder, there is a strong evidence base for medication treatment, particularly using agonist therapies (i.e., methadone and buprenorphine), but mixed evidence regarding the use of psychosocial interventions. For alcohol use disorder, there is evidence of modest effectiveness for two medications (acamprosate and naltrexone) and for various psychosocial treatments, especially for less severe alcohol use disorder syndromes. An important area for future research is how to make treatment more appealing to clients, given that client reluctance is an important contributor to the low utilization of effective treatments. A second major focus of research has been the availability of medication treatments, building on existing theories of how innovations diffuse, and on the field of dissemination and implementation research. In the United States, this research identifies serious gaps in both the availability of SUD treatment programs and the availability of effective treatment within those programs. Key barriers include lack of on-site medical staff at many SUD treatment programs; restrictive policies of private insurers, states, and federal authorities; and widespread skepticism toward medication treatment among counseling staff and some administrators. Emerging research is promising for providing medication treatment in settings other than SUD treatment programs, such as community mental health centers, prisons, emergency departments, and homeless shelters. There is still considerable room to make SUD treatment approaches more effective, more available, and—most importantly—more acceptable to clients.


The Effect of Government Policy on Pharmaceutical Drug Innovation  

Ayman Chit and Paul Grootendorst

Drug companies are profit-maximizing entities, and profit is, by definition, revenue less cost. Here we review the impact of government policies that affect sales revenues earned on newly developed drugs and the impact of policies that affect the cost of drug development. The former policies include intellectual property rights, drug price controls, and the extension of public drug coverage to previously underinsured groups. The latter policies include regulations governing drug safety and efficacy, R&D tax credits, publicly funded basic research, and public funding for open drug discovery consortia. The latter policy, public funding of research consortia that seek to better understand the cellular pathways through which new drugs can ameliorate disease, appears very promising. In particular, a better understanding of human pathophysiology may be able to address the high failure rate of drugs undergoing clinical testing. Policies that expand market size by extending drug insurance to previously underinsured groups also appear to be effective at increasing drug R&D. Expansions of pharmaceutical intellectual property rights seem to be less effective, given the countervailing monopsony power of large public drug plans.