1. Government Research

Advantages

a. Minimizes deadweight loss through reliance on income-tax funding instead of monopoly pricing

(Partially offset by another distortion: By decreasing the benefits of labor, each income tax increase will cause taxpayers to substitute leisure for work, causing economic losses)

b. Minimizes rent dissipation through duplicative research at the primary and secondary levels, because the government coordinates innovation at both levels

c. Flexibility in responding to changes in research agenda

Disadvantages

a. Government officials are prone to errors in determining which projects are (most) socially valuable

b. Low salaries and bureaucracy make government a poor venue for innovative activity, particularly with respect to artistic creativity

2. Grants

Advantages

a. Avoids rent dissipation, by targeting resources to one or a few firms

b. Avoids the inefficiency of multiple firms making redundant assessments of the social value of particular research projects

c. Minimizes deadweight loss through reliance on income-tax funding instead of monopoly pricing (see above)

d. Enables correction of the misalignment between the market value of innovations and their social value

Disadvantages

a. High administrative costs

b. Government officials are prone to errors in determining which projects are (most) socially valuable and in determining which grant applicants are most qualified

c. Poor motivator of innovative activity once the grant recipient has been selected (Gallini/Scotchmer 2002)

3. Prizes

Advantages

a. Competition in the quest for the pot of gold fosters fast, focused research

b. Optional Reward System will optimize incentives for creativity (Shavell & Ypersele 2001)

c. Minimizes deadweight loss through reliance on income-tax funding instead of monopoly pricing (see above)

d. Enables correction of the misalignment between the market value of innovations and their social value

Disadvantages

a. High administrative costs

b. Government officials are prone to errors in determining which projects are (most) socially valuable; automated mechanisms for making those determinations are imperfect (Liebowitz 2003)

c. Leads to rent dissipation by fostering wasteful duplicative innovation

4. Self-Help

Advantages

a. Legal protections for trade secrets prevents wasteful private expenditures on security precautions

b. Restrictions on reverse engineering may enable innovators to recover costs through lead time and thus avoid need for other, more social costly incentive systems (Samuelson/Scotchmer 2002)

Disadvantages

a. Secrecy deprives the public of knowledge of the innovation, shields information that would be produced anyway, and impedes mobility of skilled labor (Bone 1998)

b. Prohibition of reverse engineering fosters wasteful duplicative construction techniques and may frustrate interoperability

c. Rigidity of technology mandates inhibits innovation

d. Anti-circumvention rules and technology mandates have trouble accommodating public-regarding exceptions (e.g., fair use in copyright; experimental use in patent)

5. Intellectual Property

Advantages

a. Competition in the quest for the pot of gold fosters fast, focused research

b. Relies upon the market to drive research toward areas of high social value

(undermined in some contexts by imperfect connection between willingness and ability to pay and social value)

c. Relies upon private parties knowledge of the costs of R&D, marketing, etc. (Gallini/Scotchmer 2002)

d. Imposes costs of innovation upon the (initial) users of the innovations and thus avoids the distortions associated with cross subsidies

Disadvantages

a. Administrative and Litigation Costs

b. Monopoly pricing deprives some potential consumers of access to the fruits of innovation, leading to deadweight loss

(under appropriate market conditions, this drawback may be mitigated by differential pricing -- Viscusi 1995; Sykes 2002)

c. Impediments to Cumulative Innovation

(may be mitigated by opportunities for licensing [Green/Scotchmer 1995; Lemley 1997; Heller/Eisenberg 1998; Sprigman 2004])

(may be exacerbated by patent thickets [Eisenberg; Rai; Kieff 2001; Adelman 2005; Lei et al 2009])

d. Leads to rent dissipation by fostering excessive duplicative innovation

e. Depends upon legal enforcement mechanisms that may be ineffective when violations are widespread (e.g., in digital environments) or difficult to detect (e.g., new-use patents; patents on industrial processes)