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Contracting over the Disclosure of Scientific Knowledge: IP Protection and Academic Publication

Joshua Gans, Fiona Murray & Scott Stern MIT Organizational Economics Seminar September 2010

Process of Growth

Process of Growth

Increase in Knowledge

 At 

Process of Growth

New Goods at t

xt 

Increase in Knowledge

 At 

Process of Growth

New Goods at t

xt 

Increased Productivity

Increase in Knowledge

 At 

Process of Growth

New Goods at t

xt 

Increased Productivity

Increase in Knowledge

 At 

 δ H A (At + At )    
R&D Productivity

Process of Growth

New Goods at t

xt 

Increased Productivity

Increase in Knowledge

 At 

 δ H A (At + At )    
R&D Productivity

Future Knowledge

 At +1 

Process of Growth

New Goods at t

xt 

Increased Productivity

Increase in Knowledge

 At 

Appropriated

 δ H A (At + At )    
R&D Productivity

Future Knowledge

 At +1 

Process of Growth

New Goods at t

xt 

Increased Productivity

Increase in Knowledge

 At 

Appropriated

 δ H A (At + At )    
R&D Productivity

Future Knowledge

 At +1 

Spillover

Interaction between commerce and science

Interaction between commerce and science
• Widespread and longstanding concern that ‘commercial interests’ hinder open science • Anti-commons movement (Heller & Eisenberg) • Evidence of IP protection correlated with less intense academic activities (Murray & Stern, 2007; Murray, Aghion et al, 2009) • Evidence of IP protection correlated with fewer commercial applications (Williams, 2010)

Interaction between commerce and science
• Widespread and longstanding concern that ‘commercial interests’ hinder open science • Anti-commons movement (Heller & Eisenberg) • Evidence of IP protection correlated with less intense academic activities (Murray & Stern, 2007; Murray, Aghion et al, 2009) • Evidence of IP protection correlated with fewer commercial applications (Williams, 2010) • Policy moves to change how academic science uses patents • Bayh-Dole Act • Reach through licensing rights • Academic science as evidence of priority

Pasteur’s Quadrant

Pasteur’s Quadrant
• Dual knowledge: an idea is both a new product and an input into the production of future knowledge • Stokes called this ‘Pasteur’s Quadrant’ • Core assumption in endogenous growth theory (Romer, Aghion & Howitt)

Pasteur’s Quadrant
• Dual knowledge: an idea is both a new product and an input into the production of future knowledge • Stokes called this ‘Pasteur’s Quadrant’ • Core assumption in endogenous growth theory (Romer, Aghion & Howitt) • Evidence that many patents associated with publications • Over half of all publications in Nature Biotechnology paired with patents (Murray & Stern) • Majority of human genome patents paired with publications (Jensen & Murray)

Pasteur’s Quadrant
• Dual knowledge: an idea is both a new product and an input into the production of future knowledge • Stokes called this ‘Pasteur’s Quadrant’ • Core assumption in endogenous growth theory (Romer, Aghion & Howitt) • Evidence that many patents associated with publications • Over half of all publications in Nature Biotechnology paired with patents (Murray & Stern) • Majority of human genome patents paired with publications (Jensen & Murray) • Studies of the motivation of scientists in dual knowledge environments • Merton • Stern (2004) • Aghion, Dewatripont & Stein (2009)

Disclosure Paths
• Intellectual property system • Romer emphasized the 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

This paper ...

This paper ...
• Research contribution: endogenise the choice of disclosure strategy as negotiated between scientists and their funders

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 • What are the economic forces driving knowledge disclosure? • A missing micro-foundation for endogenous growth theory and a missing theory of patent-paper pairs • Are patents and publications complements or substitutes? • Complementarity is assumed and necessary in endogenous growth • Substitutability is the concern at the heart of policy debates

… results

… 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)

… 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

… 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

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

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

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 • Simplifying assumptions • Single scientist and single firm (bilateral monopoly) • Single project (more about funding an academic scientist than scientist-employee) • No outside options (relaxed in the paper)

Choice of disclosure regimes

Publication disclosure (d)

0 1
Patent (i)

D Patent-Paper Pairs Open Science

Commercial Science Secrecy

0

Preferences
• Scientist

U = w + bS d   wage
kudos

• Firm (Funder): expected profit of private funder

Monopoly Profit

Π 

− k − w − Pr(Successful Entry)(Π − 
Capital Cost

Competitive Profit

π 

)

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

Impact of Patents

Impact of Patents
• Creates cost of workaround • Additional entry cost: λ

Impact of Patents
• Creates cost of workaround • Additional entry cost: λ • Blocked entry • Probability entry is prohibited entirely: ρ

Impact of Patents
• Creates cost of workaround • Additional entry cost: λ • Blocked entry • Probability entry is prohibited entirely: ρ • Disclosures • Minimum disclosure requirements in the patent: dPAT • Literally, the probability disclosures yield knowledge that reduces entry costs by bE

Impact of Patents
• Creates cost of workaround • Additional entry cost: λ • Blocked entry • Probability entry is prohibited entirely: ρ • Disclosures • Minimum disclosure requirements in the patent: dPAT • Literally, the probability disclosures yield knowledge that reduces entry costs by bE • Congruence • Probability patent and publication disclosures overlap: α

Probability of Entry 1

0

Probability of Entry 1
π

0

Probability of Entry 1
π
(1 − i ρ )π

0

Probability of Entry 1
π
(1 − i ρ )π

(1 − i ρ )π − iλ

0

Probability of Entry 1
π
(1 − i ρ )π

(1 − i ρ )π − iλ + bE Pr(Disclosure)
(1 − i ρ )π − iλ

0

Probability of Entry 1
π
(1 − i ρ )π
Pr (Disclosure)

(1 − i ρ )π − iλ + bE Pr(Disclosure)
(1 − i ρ )π − iλ

0

Probability of Entry 1
π
(1 − i ρ )π
Pr (Disclosure) = (1 − α ) ( i Pr (Learn from Patent)+Pr(Learn from Pub))

+ α i Pr(Learn from Either)

(1 − i ρ )π − iλ + bE Pr(Disclosure)
(1 − i ρ )π − iλ

0

Probability of Entry 1
π
(1 − i ρ )π
Pr (Disclosure) = (1 − α ) ( i Pr (Learn from Patent)+Pr(Learn from Pub))

+ α i Pr(Learn from Either) = (1 − α ) ( idPAT + d ) + α ( idPAT + d − idPAT d )

(1 − i ρ )π − iλ + bE Pr(Disclosure)
(1 − i ρ )π − iλ

0

Probability of Entry 1
π
(1 − i ρ )π
Pr (Disclosure) = (1 − α ) ( i Pr (Learn from Patent)+Pr(Learn from Pub))

+ α i Pr(Learn from Either) = (1 − α ) ( idPAT + d ) + α ( idPAT + d − idPAT d ) = idPAT + d − α idPAT d

(1 − i ρ )π − iλ + bE Pr(Disclosure)
(1 − i ρ )π − iλ

0

Probability of Entry 1
π
(1 − i ρ )π

(1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)
(1 − i ρ )π − iλ

0

Probability of Entry 1 1

(1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)

0

0

Probability of Entry 1 1

(1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)

Random Fixed Cost, θ

0

0

Probability of Entry 1 1

(1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)

= Pr (entry)

Random Fixed Cost, θ

0

0

Expected Profits

Monopoly Profit

Π 

− k − w − Pr(successful entry)(Π − 
capital cost

Competitive Profit

π 

)

Expected Profits

Monopoly Profit

Π 

− k − w − Pr(successful entry)(Π − 
capital cost

Competitive Profit

π 

)

Pr (successful entry) = (1 − i ρ )Pr(entry) = (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d))

Expected Profits

Monopoly Profit

Π 

− k − w − Pr(successful entry)(Π − 
capital cost

Competitive Profit

π 

)

Pr (successful entry) = (1 − i ρ )Pr(entry) = (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d))
The potential for entry is increasing in both patenting and publication disclosure, while the cost of entry may or may not rise if there is a patent.

Easy Case: 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.
Secrecy

Returns to i
Patent-Paper Pairs

Returns to d

Negotiations
• Use the Nash bargaining solution • Negotiate over w, i and d ∈ [0, D] • Patent (i) and publication (d) used to increase surplus • Wages (w) used to distribute surplus • Technical issue: wages cannot be negative • When w > 0, choose i and d to maximise total surplus • But if w = 0, total surplus not maximised • As increase d, reduce w: if bS relatively high may want zero wages • This occurs if

Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE idPAT ) (Π − π ) D>d= bS + bE (1 − i ρ )(1 − α idPAT )(Π − π )

Total Surplus Maximisation (d)
• Assume that D < d • Choose i and d to maximise:

bS d + Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)) (Π − π )
• Disclosure Choice: set d = D if

Total Surplus Maximisation (d)
• Assume that D < d • Choose i and d to maximise:

bS d + Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)) (Π − π )
• Disclosure Choice: set d = D if

bS ≥ (1 − i ρ )bE (1 − α idPAT )(Π − π )

Total Surplus Maximisation (d)
• Assume that D < d • Choose i and d to maximise:

bS d + Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)) (Π − π )
• Disclosure Choice: set d = D if

bS ≥ (1 − i ρ )bE (1 − α idPAT )(Π − π )
bS Δd ≡ ≥ (1 − i ρ )(1 − α idPAT ) bE (Π − π )

Total Surplus Maximisation (d)
• Assume that D < d • Choose i and d to maximise:

bS d + Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)) (Π − π )
• Disclosure Choice: set d = D if

bS ≥ (1 − i ρ )bE (1 − α idPAT )(Π − π )
bS Δd ≡ ≥ (1 − i ρ )(1 − α idPAT ) bE (Π − π )

Total Surplus Maximisation (d)
• Assume that D < d • Choose i and d to maximise:

bS d + Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)) (Π − π )
• Disclosure Choice: set d = D if

bS ≥ (1 − i ρ )bE (1 − α idPAT )(Π − π )
bS Δd ≡ ≥ (1 − i ρ )(1 − α idPAT ) bE (Π − π )
More likely to be satisfied if there is a patent.

Total Surplus Maximisation (i)
• Assume that D < d • Choose i and d to maximise:

bS d + Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)) (Π − π )
• Patent Choice: set i = 1 if

Total Surplus Maximisation (i)
• Assume that D < d • Choose i and d to maximise:

bS d + Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)) (Π − π )
• Patent Choice: set i = 1 if

Π − k − (1 − ρ ) ( (1 − ρ )π − λ + bE dPAT ) (Π − π ) Δi ≡ ≥1 Π − k − π (Π − π )

Total Surplus Maximisation (i)
• Assume that D < d • Choose i and d to maximise:

bS d + Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)) (Π − π )
• Patent Choice: set i = 1 if

Π − k − (1 − ρ ) ( (1 − ρ )π − λ + bE dPAT ) (Π − π ) Δi ≡ ≥1 Π − k − π (Π − π )

Can show that publication means that a patent may be chosen even if Δi < 1.

Complementarity
Δi
Commercial Science Patent-Paper Pairs

Secrecy

Open Science

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. • Patent breadth (λ): as patent breadth increases, this increases patent-paper pairs relative to other regimes. • Intuition: patents more effective at reducing entry so more likely to be chosen reducing the marginal cost of publication disclosure.

Independent Choices
• Suppose d and dPAT revealed information about distinct 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.

Δi
Commercial Science Patent-Paper Pairs

1
Secrecy Open Science

1

Δd

Possibility of Zero Wages
• D>d • 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

d =
* i

Π − k − (1 − iρ ) (1 − iρ )π − iλ + bE id PAT (Π − π ) 2(1 − iρ )bE (1 − α id PAT )(Π − π )

(

)

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

Dynamic Extension

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

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

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.  However, if work-around then do not cite previous work.

License Negotiations

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

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

Licensing cumulative innovation

Licensing cumulative innovation
• Suppose that future research teams build on current innovation

Licensing cumulative innovation
• Suppose that future research teams build on current innovation • Disclosures reduce costs to future research teams

Licensing cumulative innovation
• Suppose that future research teams build on current innovation • Disclosures reduce costs to future research teams • Having a patent, gives current research team an opportunity to extract some future innovative rents through licensing • Suppose that licensing is accompanied by full disclosure (no noncontractibility problem) • Publication may allow some knowledge transfer even without licensing • Therefore, publication reduces the future license fee

Licensing cumulative innovation
• Suppose that future research teams build on current innovation • Disclosures reduce costs to future research teams • Having a patent, gives current research team an opportunity to extract some future innovative rents through licensing • Suppose that licensing is accompanied by full disclosure (no noncontractibility problem) • Publication may allow some knowledge transfer even without licensing • Therefore, publication reduces the future license fee • As future licensing is only possible with a patent, it follows that stronger patent incentives may cause a reduction in publication incentives

Licensing cumulative innovation
• Suppose that future research teams build on current innovation • Disclosures reduce costs to future research teams • Having a patent, gives current research team an opportunity to extract some future innovative rents through licensing • Suppose that licensing is accompanied by full disclosure (no noncontractibility problem) • Publication may allow some knowledge transfer even without licensing • Therefore, publication reduces the future license fee • As future licensing is only possible with a patent, it follows that stronger patent incentives may cause a reduction in publication incentives • This is countered by static publication incentives and also scientist’s desire for future kudos (through citation)

Substitutability
Δi
Commercial Science Patent-Paper Pairs

1
Secrecy Open Science

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.