When patents are not enough: Supplementary incentives for pharmaceutical innovation

Abstract

Patents have proven to be an exceptionally effective mechanism for motivating innovation. A patent gives a firm the right to apply to the courts to enforce exclusive rights to the patented invention for a fixed period of time. The particular strength of the system is that patents offer a reward correlated with the value that consumers obtain from the product. Firms make decisions to invest in innovation based on their own information about the probability of success and the costs of research, as well as the expected value of the patent. The problem addressed in this paper relates to situations where for some reason the value of the patent reward is relatively low compared to the social value created by the innovation: that is, where the appropriability of social value is low. In these cases, firms will fail to invest in innovation even though its value to society is high.