Incentives for Innovation: Patents, Prizes, and Research Contracts

Innovation is essential for sustaining growth and economic development in a world that faces population increase, natural resource depletion, and environmental challenges. Incentives play a critical role in innovation because the required research and development activities are costly, and the resulting knowledge has the attributes of a public good. This paper discusses the economics of institutions and policies meant to provide incentives for research and innovation, and focuses on intellectual property rights, specifically patents, contracted research (for example grants), and innovation prizes. The main economic implications of these institutions are discussed, with particular attention paid to open questions and recent contributions.