Wednesday, June 10, 2015

Intellectual Property Rights, Innovation, and Regulatory Capture

There's quite a bit out there right now about the Trans-Pacific Partnership (TPP) and its supposed provisions on Intellectual Property Rights (IPR). The nature of the current dispute is that US negotiators (in some cases rightly) claims that IPR laws in many countries are too lax, whereas negotiators in other countries claim that US property rights laws (which the US seeks to embed in a proposed agreement) are too strict.
Who's right? Answer: Both of them, but not necessarily for the reasons we might think.
The claim for the US is pretty straightforward: Without IP laws, innovators cannot profit from their ideas because copycats will steal those ideas with disastrous consequences for the incentive to innovate. This is a true enough claim, and one might think that if some protection is good then a lot of protection is even better, and so the US IPR system should be transplanted - even strengthened and made more strict - worldwide.
The flip side of the argument is that IPR law grants big firms (Pharma, for example) monopolies that increase prices, make technologies (and other innovations) unaffordable in poor countries, and hence make development unachievable. While this is true, it partly misses the point: After all, stricter property rights enforcement would presumably give all countries the opportunity to benefit from the innovations of its work forces.
Instead, the real problem with very strict IPR laws is that it may actually stifle innovation on some margins. In the US, any patent that would improve existing technologies requires the patent applicant to attain permission from each and every patentholder on the technology she wishes to improve. Many technological improvements in the Industrial Revolution were in fact this type of marginal innovation by nameless, faceless workers looking to make their own jobs easier. These innovations are somewhat restricted under current IP law.
Another problem with strict IPR laws is that it changes the nature of innovation. Take pharma for example. A number of the biggest problems facing medicine today are "public health" issues. These issues may disproportionately affect poorer citizens or countries, or they may be relatively randomly distributed. However, the most profitable innovations are the ones that provide private benefits. Thus, the industry is more apt (under current laws) to "innovate" new cholesterol pills and boner pills - medicines that solve private health issues, or problems that may disproportionately affect richer people. How's a firm to profit from creating a vaccine for ebola or HIV?
So, in many ways, the optimal strictness is probably somewhere between the US patent troll system and a Hong Kong free-for-all. In other words, and stealing (but innovating on!) an idea by Alex Tabarrok:

Productivity Growth CAN Reduce Middle Class Incomes!

Tyler at Marginal Revolution asks the question "How can faster productivity growth NOT raise middle class incomes?"
Am I missing something? Is it a trick question? It seems like there is a simple principle-of-economics answer. Faster productivity growth could lower (real) middle class incomes if the following are all true:
1. Productivity growth only increases productivity for capital and not for labor. Hence, the direct impact of the growth will be to shift demand for capital to the right, and increase the price and quantity of capital.
2. Middle class households mostly earn income from selling labor (and not capital). This seems to hold up empirical given the very high concentration of wealth relative to income.
3. Middle class households' labor is a strong substitute for capital. In other words, the increased productivity of capital leads to a (large) shift in relative factor demand away from labor and towards capital.
3.

Scott Walker's War on Tenure: An Institutional Economics Analysis

Scott Walker has declared war on tenure, and it has been reported on nationally (in the NYTimes or Inside HigherED and the Washington Times) and blogged about by some economists (Tyler Cowen and Menzie Chinn) But Scott Walker only half-understands tenure, and the half he understands leads him to miss the point of it.
Granting a faculty member indefinite tenure is a mutually-beneficial contracting mechanism that benefits both faculty and colleges. To understand this, we have to understand the different aspects of a faculty member's productivity:
1. Teaching. At most colleges, teaching is the most important service a faculty member provides for her institution. This involves teaching a subject area well, and defending academic standards.
2. Service to the Institution. This might include curriculum/course development, advising, committee work, or generally helping out with administration of academic programs.
3. Research. This mostly includes publications.
4. Service to the Profession. This might include serving as a referee for journals, membership and service in professional organizations, etc.
Aspects (1) and (2) involve "firm-specific human capital investments" and mostly benefit the institution, whereas (3) and (4) involve "general human capital investments," and mostly benefit the individual faculty member (and her ability to find a job elsewhere!). More generally speaking, there are a lot of high-skill jobs that involve similar types of tradeoffs in the allocation of effort for investing in human capital, but this is especially pronounced, I think, in Academia.
This presents an interesting contracting challenge. Institutions would like high levels of effort in all areas, but would especially like high effort in firm-specific areas (teaching and administration). Tenure partially helps achieve this, and this is where the half of tenure Walker doesn't understand comes into play. On the one hand, Walker is correct that tenure has a general tendency to reduce the overall incentives facing a faculty member and thus may reduce total effort (although even this is not fully clear since tenure reduces aggregate uncertainty, and uncertainty can sometimes be a disincentive to work). On the other hand, Walker fails to recognize that tenure also increases the relative incentive for making "firm-specific human capital investments" - investments in teaching and curriculum development. (Side note: tenure is also creates similar substitutions within the allocation of research time away from small "marginal discoveries" and towards bigger projects that may attract acclaim for the institution.)
Hence, university presidents should be wary of abolishing tenure, and not only for altruistic reasons. By increasing uncertainty about continued employment, educational quality suffers. Regular faculty members will invest more time in research (who knows, I may need a job somewhere else?) and retreating on standards (students better like my teaching - and populate my classes - or I won't get to stay).