The academic literature on the prize system describes prizes as a radical alternative to intellectual property. The debate over which system is preferable has existed for centuries and usually boils down to a single question: Can the government determine the appropriate reward for innovations without relying on intellectual property rights to reveal their value to consumers? If yes, scholars assume that prizes are superior because they avoid deadweight loss and provide equal or better incentives for innovation. This reflects a fundamental misunderstanding of the nature of intellectual property rights. It equates intellectual property with uniform monopoly pricing and monopoly profits, while depicting the prize system as the only effective strategy to achieve efficient consumer pricing and government control over rewards. In reality, intellectual property merely provides a right to exclude others from the market. Governments can and often do institute policies that resemble prize systems—in both their structure and objectives—alongside intellectual property systems. Governments use subsidies (and sometimes price controls) to push consumer prices closer to marginal cost and adjust the incentives for innovation. Given these other policy levers available within an intellectual property regime, the existing prize literature has exaggerated and misconceived the differences between the two systems. Under many circumstances, the prize system has no advantage over intellectual property in terms of avoiding deadweight loss. Moreover, intellectual property will frequently offer superior incentives to prizes—irrespective of whether it is used to measure an invention’s value to consumers—because it provides an ongoing check against expropriation, thereby permitting renegotiation of rewards over time to reflect changing estimations of an invention’s social value. Contrary to the long-standing framework used to compare the two systems, intellectual property may be superior to prizes even when the government can determine the appropriate reward for innovations.
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