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The Accumulation of Knowledge

  Dual knowledge: an idea is both a new product and an input into the production of future knowledge (Romer, Aghion & Howitt)   Persistent economic growth relies on inter-temporal knowledge spillovers through cumulative innovation (Jones)   The mere production of knowledge does not guarantee that others will be able to exploit that knowledge (Polanyi; Mokyr)
  Tacit Knowledge   Trade Secrecy

  Open question: what are the economic forces driving knowledge disclosure – a missing micro-foundation for endogenous growth theory.

The Duality of Knowledge
Adapted from Stokes (1997)
Low
Immediate usefulness
High

Low
Scientific Merit
High

Disclosure Paths
  Intellectual property system
  Romer emphasized fact that when you obtain a patent, the disclosures in the application can be used for future research   but … may prefer secrecy to obtaining a patent (Mansfield, Anton & Yao, Denicolo & Franzoni, Kultti, Takalo & Toikka, Erkal)

  Open science and publication
  Norms (Merton) and incentives (Dasgupta & David)   Intrinsic preferences (Stern; Aghion, Dewatripont & Stein)

  Both paths involve choices and form part of a disclosure strategy

How often are scientific research publications part of patent-paper pairs?
# papers # paired with patents % paired publications

Publications by public sector funded researchers Publications by public and private sector funded researchers Publications by private sector funded researchers

235

106

45%

70

41

59%

36

24

67%

Starting with publications: From a sample of 341 research publications (all the research articles from the leading life science journal Nature Biotechnology between 1997 and 1999). Examine which publications are also disclosed in patents. (Murray and Stern 2007)

How often are patents part of a patent-paper pairs?
# patents # paired with publications % paired patents

Patents by public sector funded researchers Patents by public and private sector funded researchers Patents by private sector funded researchers

1308 187 2775

1099 164 1347

84% 88% 49%

Starting with patents: From the full population of human gene patents (US patents identified using bioinformatics methods that disclose and claim a human gene sequence or fragment; Jensen and Murray 2005), which patents are also disclosed in publications? (Huang and Murray 2008).

This paper …
  Research contribution: endogenise the choice of disclosure strategy as negotiated between scientists and their funders   Key output is to understand interaction between patenting and publication
  Complementarity is assumed and necessary in endogenous growth   Concerns about substitutability: that patenting could crowd out publication (Heller & Eisenberg)

  Empirical backdrop
  High and increasing incidence of patent-paper pairs (Murray)   Evidence that patents may reduce inter-temporal spillovers (Murray & Stern, Williams)

… results
  Baseline conclusion: several fundamental drivers of complementarity between patents and publication
  Congruence (overlap in patent/publication disclosures)   Competitive protection (effective patents block entry providing insurance against entry-promoting disclosures)   Non-economic payments (patents improve commercial outcomes and publications are used to reward scientists)

  Dynamic extension: patents may reduce publication incentives   Design of IP protection
  Stronger IP can increase scientific openness   But simple disclosure rules and rights have unintended consequences

Key Model Elements
  Role of disclosure
  Potentially fosters imitative entry (reducing commercial returns) – can happen through patent and/or publication disclosures   Generates scientific kudos (through publication only) although scientists also care about income   Patent and publication disclosures might overlap

  Disclosure strategy
  Outcome of negotiation between (academic) scientist and firm over payments, IP strategy and publication rights   Scientist assumed to be wealth constrained

Congruence
The BLNK gene:
  “We describe here the identification of a novel B cell linker protein, termed BLNK, that interfaces the B cell receptor-associated Syk tyrosine kinase with PLCgamma, the Vav guanine nucleotide exchange factor, and the Grb2 and Nck adapter proteins” (Fu et al, Immunity, 1999).   “the discovery of molecules which interact with either Grb2 or PLC-γ … play a role in the regulation of … signaling pathways are desired. Accordingly, it is an object of the present invention to provide such molecules, termed ‘BLNK’ proteins, and to provide methods of using such molecules in screening assays”. (USPTO patent 5994522)   While the patent and paper disclose essentially the same information in this congruent patent-paper pair, other publications go beyond the patent disclosure to offer a landscape for future research or enable imitation above and beyond the patent disclosure

The Model
  Single scientist is hired by a single firm in order to produce knowledge that potentially has significant scientific value and/or commercial returns   The firm’s expected return from the innovation depends on their ability to limit potential competition
  Relative to secrecy, a patent grant increases the fixed cost of entry (λ) but only a imperfect chance of blocking entry (ρ)   However, disclosures through patenting (dPAT) or publication (d) reduce the fixed cost of entry. d is a choice between 0 and D.

  The scientist cares about their monetary compensation (w) and their ability to earn “kudos” through publication (bs). If they do not participate in the project, the scientists earns outside utility of 0 (generalised in the paper).

Under what conditions does the firm and researcher choose each of the following disclosure regimes?

Publication disclosure (d)

0 1
Patent (i)

1 Patent-Paper Pairs Open Science

Commercial Science Secrecy

0

Preferences
  Scientist

  Firm/Private Funder
  Monopoly profit: Π – w   Competitive profit: π – w   Expected profit of the private funder:

  While researchers care about scientific disclosure, investors care about the impact of disclosures on potential competition

Disclosures Jointly Impact on Entry
  Consider a potential entrant who faces the following profit function   λ and ρ are the strength of patent protection   α is the degree of fidelity between disclosure paths   bE is the reduced marginal cost of entry due to disclosures d and dPAT
  θ is distributed uniformly on [0,1]
  π + bE < 1 (entry always uncertain)   The potential for entry is increasing in both patenting and publication disclosure, while the cost of entry is increasing in the receipt of a patent

Complete Overlap
  Suppose that the knowledge disclosed in a patent and publication were exactly the same.   Then if decide to patent, there is no additional cost in publishing and vice versa.   Would only observe secrecy and patent-paper pairs.

Negotiations
  Scientist and firm negotiations over disclosure regime:

Unconstrained wage: w > 0 • Relative commercial return high • Choose (i, d) to maximise joint surplus • So long as

Constrained wage: w = 0 • Relative commercial return low • Use d to transfer utility between firm and scientist (D > d) • Choose (i, d) to maximise NTU Nash objective

Two key expressions shape the decision of whether to allow scientific disclosure, patenting, or produce patent-paper pairs…
  Consider the choices that maximise surplus   Scientific disclosure? … consider the ratio of the marginal benefit versus marginal cost of scientific disclosures. Choose no disclosure if

  Patent?… consider the ratio of the marginal benefit to the marginal cost of publication…choose to patent if

Complementarity: when patents and publications are partially overlapping in terms of disclosure, the patent-paper regime expands when the strength of intellectual property protection increases…

Commercial Science

Patent-Paper Pairs

1

Secrecy

Open Science

1

Δd

Sources of Complementarity
  Congruence (α): as α increases, this increases patent-paper pairs relative to other regimes.
  Intuition: the marginal cost of disclosure is lower if there is a patent as less entry-facilitating knowledge is likely to be generated.

  Patent effectiveness (ρ): as the effectiveness of a patent in blocking entry rises, this increases patent-paper pairs relative to other regimes.
  Intuition: if a patent can actually block entry (ρ = 1), the disclosures are not commercially harmful.

Possibility of Zero Wages
  If publishing maximises joint surplus, w = 0
  Increase d until wage is constrained   Beyond this point, d used as compensation.

  Increasing λ and ρ

  More likely to take out a patent   If there is publication, negotiate more disclosure

  Increasing dPAT
  Less likely to take out a patent   If there is a publication, reduces disclosure

Stronger IP protection (higher λ and ρ) stimulates open science. Higher dPAT may not increase disclosure if it causes strategy to move to secrecy.

Independent Choices
  Suppose d and dPAT revealed information about distinct Δi knowledge (α = 0)   Suppose patent protection ineffective in blocking entry (ρ = 0)   When Δd > 1, surplus maximisation would involve d=D   Wages always zero (the outside option) when there is publication   Decisions do not interact.
Commercial Science 1 Patent-Paper Pairs

Secrecy

Open Science

1

Δd

Generating Substitutability
  Static model yields several clear drivers of complementarity between patents and publications
  Theory of patent-paper pairs   Microfoundation for endogenous growth assumption

  Conflicting empirical evidence
  Murray and Stern: citations fall following patent grant   Williams: fewer follow-on commercialized products when scientific knowledge subject to IP protection

  Empirical research identifies impact on follow-on research direction and acknowledgment (source of kudos)

Dynamic Extension
  Suppose that scientists and firms live two periods   Overlap with other generations   Future kudos generated by citation as well as publication   Assume away sources of complementarity (α = ρ = 0) but otherwise same model   Past knowledge reduces future capital costs, k   Full transfer (under contracting): zero future costs   Partial transfer (through publication): (1-dt-1)k   Firm owns patent and can license it to next generation   Disclosure, fee & wages now a 3-way negotiation   Use Nash bargaining solution   Past publication gives future pair an easier work-around if there is no license – work-around possible (on same research path) with probability γ.

License Negotiations
  Outcomes
  If no patent, τ = 0   If patent but no publication, τ = k/3   If patent and past publication, τ = k(1-(1-γ)dt-1)/3

  Patent-Paper Pairs
  For δ sufficiently high, patent-paper pairs can be an equilibrium   Presence of patent reduces incentives for publication and vice versa when γ < 1

Substitutability
Commercial Science Patent-Paper Pairs

1
Open Science

Secrecy

1

Δd

Other implications
  Look only at symmetric dynamic equilibria   Inter-temporal complementarity
  Only worthwhile publishing if expect future scientific work to be published (so can earn a citation)   Therefore, there can exist multiple equilibria with commercial science or secrecy always an equilibrium under certain conditions.

  Domain of open science is expanded as a result of substitutability

IP ownership
  Dynamic model assumes that the firm owns the IP rights and negotiates over the license fee.   What if the scientist owned those rights?
  It would then care about future publication in order to generate a citation.

  Consequences:
  A reduced future license fee when there is a publication   In negotiations, the scientist and firm are less likely to publish as this will reduce license revenues even further   Openness may be facilitated by leaving IP rights in the firm’s hands.

Key Extensions
  Public funding: impact and restrictions   Scientific and Commercial Research Racing   Empirical: Human Genome Project

Conclusions
  The disclosure strategy of privately funded research is grounded in the disclosure environment and is shaped by the bargaining over disclosure between scientists and their funders   Rather than an anomaly, patent-paper pairs emerge as an equilibrium outcome in which scientific researchers trade off wages in order to gain scientific credit, while investors (private or public) seek to retain the ability to capture value from these “dual-purpose” discoveries   Interestingly, in most circumstances, increases in the strength of formal intellectual property protection enhances the scope for patent-paper pairs.   More generally, the model suggests that the key requirements for cumulative disclosure in the aggregate requires a careful evaluation of the strategic foundations of disclosure strategy.