Re: AltInst: Patent Buyouts

From: Dean Brettle <>
Date: Thu Apr 08 1999 - 11:49:26 PDT

Robin Hanson wrote:
> I posted this article & abstract:
> >Quarterly Journal of Economics, Nov. 1998, pp. 1137-1167.
> >Patent Buyouts: A Mechanism for Encouraging Innovations
> > by Michael Kremer
> >... Most patents purchased would be placed in the public
> >domain, but to induce bidders to reveal their valuations, a few
> >would be sold to the highest bidder.
> Lee Daniel Crocker responded:
> >The obvious problem is that it's impossible to know the "value"
> >of an innovation until long after it has been in use.
> Reread that last sentence of the abstract. The idea is to hold
> an auction for each patent, but then to usually not actually
> sell most of them, using the auction price to pay the creator.
> See the article for more details.

Maybe I missed something, but I think you may have misunderstood his
point. The abstract implies that an auction would accurately reveal the
value of the innovation. While it would clearly result in a valuation,
it is questionable how *accurate* that valuation would be. This problem
has nothing to do with whether the patent is actually sold. You could
auction off every patent when it is approved and the valuations would
still not accurately reflect there eventual value to society.

The problem with the proposed system (as I understand it based on the
abstract) is that the inventor is *required* to auction off his idea.
If the inventor thinks that his idea is worth $1M and the market thinks
it is worth $100K and the inventor is right, he has lost $900K vis-a-vis
the current system. He would not be paid in proportion to the actual
value of his innovation to society. An auction system would primarily
encourage innovative *marketing* instead of real innovation. :-)

Moreover, I think that only actually selling a few of the patents would
exacerbate the problem. Wouldn't bidders' reduced exposure in such a
system mean that they would expend less resources trying to determine
the true value of the innovation?

I like your Idea Futures concept better because I *think* it avoids
these sorts of problems.

-- Dean

| Dean Brettle Computer Consulting |
| Contract development and support of software and systems |

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Received on Thu Apr 8 12:28:35 1999

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