Tuesday, March 25, 2014

Innovation Sticks

Guest Blogger

Amy Kapczynski

For the conference on Innovation Law Beyond IP at Yale Law School

Should a government ever make a firm liable for failing to innovate, instead of rewarding it for developing a new invention or information good?  This issue has received almost no attention in the existing innovation literature, which focuses almost exclusively on carrots, or opportunities to gain rewards.  The most commonly discussed carrots are IP rights, grants, and prizes.  I’m absurdly excited for the conference this weekend, in part because of the wealth of papers on long-neglected reward mechanisms, including R&D tax creditscommercialization awards, public-private R&D partnerships, and public arts infrastructure

Our contribution to the conference takes a different tack.  We argue that we should broaden our view to consider the role not only of carrots but also of sticks -- or potential penalties for failure to innovate – in innovation policy.  Why consider sticks?  For one, they’re already in use.  We offer several examples, the most prominent being the Federal Corporate Average Fuel Economy (CAFE) standards.  CAFE standards create penalties for car companies whose fleets fail to meet fuel efficiency standards that increase over time, and are set by regulators who have long seen them as “technology forcing.”  Credible studies have concluded that the CAFE program has had positive effects, including by inducing innovation to improve fuel efficiency.  In the paper, we also describe several other innovation sticks, such as tort liability for failure to test, and maximum speed limit penalties applied to states.

If innovation sticks exist, why have they been difficult to see?  And what are their possible benefits and limits?  A full explanation is available in our draft paper (email us for a copy – it is in early stages yet).  By way of sneak preview, we think that innovation sticks are difficult to see from existing theoretical accounts, because sticks cannot perform one function that is often assumed essential in the IP and information economics literature – they cannot compensate parties for their investment in information production.  But as we describe, sticks can be used to complement carrots (as is the case with CAFE), for example to help correct for market failures that traditional exclusionary carrots cannot adequately address.  Sticks can also be used in lieu of carrots – and be superior to carrots – under specific circumstances.  Sticks can be less costly than carrots because in equilibrium they do not need to be paid, and so may produce fewer price distortions.  Of course, sticks also have drawbacks. Governments designing sticks need a good deal of information. And in the long run sticks may lead to exit from an industry if they exacerbate an under-compensation problem.  If we want to avoid the nirvana-fallacy, though, we should compare the problems of sticks to the problems of their alternatives.  Sometimes governments are reasonably well informed. And the under-compensation problem that is assumed by the conventional literature is, we argue, less extensive that that account suggests.

We think that under some circumstances innovation sticks can play valuable role in our innovation policy.  We also offer a proof-of-concept model of an innovation stick that could be applied to the problem of car fatalities.  Innovation sticks could, we suggest, play a role in reducing national auto fatalities by as much 20%.

Amy Kapczynski is an associate professor law at Yale. She can be reached at amy.kapczynski at

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