Beyond Patents: Designing a Market for Ideas to Foster Innovation

Submitted for Hoover Institution Summer Policy Boot Camp Policy Proposal (2000 words)

Context: This summer, I participated in the Hoover Institution Summer Policy Boot Camp, a program “intended to instruct college students and recent graduates on the economic, political, and social aspects of United States public policy”. This involved many interesting speakers, and lots of pre-reading for their lectures. Prior to Stephen Haber’s lecture, we were set his paper Patents and the Wealth of Nations. Some of the arguments didn’t sit right with me, and I immediately wrote up some reflections, that ended up forming the first three sections of this essay. Afterwards, we had a chance to submit a Policy Proposal, “an essay of 1,500–2,000 words that advocates a a specific public policy measure”; so I turned my notes into the below, and submitted it.

Epistemic Status: I basically stand by the critique of patents. I am of course under no illusions that what I’ve proposed in their place is, as written, feasible (or even good). This is partly owing to the constraints of a 2000 word limit, partly because I had to minimise jargon and technical content, and partly no doubt a skill issue. So, I may at some point extend what I’ve written into a longer, more rigorous piece that works through the institutional design in more detail — and also e.g., model incentives formally, quantify welfare effects relative to patents, compare to existing alternatives. Consider this a first draft outline.

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Beyond Patents: Designing a Market for Ideas to Foster Innovation

Introduction

Stephen Haber’s paper Patents and the Wealth of Nations[i] is an empirical analysis of the claim made in its introduction, namely that secure and enforceable property rights, particularly patents, are fundamental to generating long-term economic growth. Haber demonstrates compellingly enough that modern econometric studies and historical evidence from Britain’s Industrial Revolution and the rise of the United States point to a clear causal relationship between strong patent rights and innovation.

His theoretical argument is simply that patents, like any other form of private property, create the security and tradability needed for markets to form around new ideas, allowing specialisation and coordination that would otherwise collapse. In this paper, I concede that patents are one way of forming the “web of contracts” Haber describes, and led to growth in the historical cases he considers. But it does not follow that they did so counterfactually, because that conclusion requires accepting his implicit assumption that in the counterfactual, nothing whatever is done about the problem of intellectual property. I argue instead that while patents are one solution to that problem, they are costly and limited, and I propose in their stead an alternative, market-friendly mechanism for addressing it.

The Problem

Intuitively, we can understand private property as a mapping from subjects (usually individuals) to objects in the world. If there is an arrow from a subject to an object, the subject enjoys a privileged liberty set over the use, transfer, or destruction of the object. Historically, both the domain and the codomain have been quite variable: the set of subjects which may have ownership rights includes not only persons, but also corporations and families; at the time of slavery, the codomain also contained individuals. Thus there is no prima facie absurdity in the suggestion that the codomain might include intangible ideas as well as physical objects. It is no more unnatural than many other such mappings, and as Haber argues (which I accept), doing so has been socially productive.

However, whereas tangible property typically represents a claim over an individuated object – this house, that car – with patents, the claim is on a generalised description (for instance, “any method of achieving X by Y”). That is, the mapping is to an equivalence class of possible instantiations, not to a single object. Haber’s example is of some new method for how a fuel injection system measures the mix of air and gasoline in a car. Against the standard model in which patents are treated as state power granting monopoly rents over an otherwise non-rival public good, he argues that patenting this idea does not lead to a monopoly, since others could still “invent around the patent” to measure the air-gasoline mixture through other methods.

But this description shows us that there is a sense in which patents violate the ordinary logic of private property, by allowing a monopoly on implementation. If I have in my possession, or acquire through free exchange, all the parts needed to put together that fuel injection system, I should be free to do so, by the definition of private property. And having done so, since the resulting device was made by combining my own labour and capital, it too is my private property that I should be free to sell according to my desires; yet under a patent regime, I may be prohibited from doing so even if my design was reached without copying.

Of course, had I been aware of the idea beforehand, one can argue that it was made partly through the labour of the person who came up with the design; in such cases, it is desirable that she be paid, to incentivise that creation. However, patent law generally does not care whether or not I came up with the idea independently[ii]. If I did, my labour and capital are subordinated to a prior paper claim simply because I was second. This is a fairness worry, and violates the Lockean intuition that property arises from mixing one’s labour with material resources.

Since the unfairness takes the form of a stealth violation of ordinary private property rights, it is accompanied by efficiency issues. Independent invention is not rare but common[iii]: Newton and Leibniz developed calculus separately; several inventors independently pioneered the telephone and jet engine. Yet under patent law, the second inventor must abandon or license her own work, even without copying, meaning the regime predictably destroys surplus. Most modern infringement suits do not even allege imitation[iv], suggesting that patents often reward being first to file rather than genuine originality.

Moreover, patents can be exploited by actors who do not contribute to production or discovery. Non-practicing entities, or “patent trolls”, purchase portfolios of claims to threaten litigation and extract settlements from firms engaged in actual research and manufacturing. Such litigation disproportionately targets cash-rich firms and reduces their subsequent innovative activity[v]. Estimated losses to publicly traded firms from troll litigation averaged over $83 billion annually between 2007 and 2010, roughly one-quarter of U.S. industrial R&D spending[vi].

None of this denies the empirical finding that stronger patent rights correlate with faster growth in patent-intensive sectors[vii]. Combining these results, we see that the mechanism is positive on average yet systematically misallocates rewards and burdens by conflating two functions: an incentive/payment mechanism to reward the original inventor; and an ownership/exclusion mechanism granting her exclusive control to block others’ implementations.

Principle: Reward Discovery Without Banning Independent Implementation

The considerations sketched above suggest two design desiderata that a policy proposal to deal with intellectual property must handle in order to retain the benefits of patents while avoiding the inefficiencies. First, society should reward discovery. The central insight in Haber’s account is correct: innovation rents arise when markets can contract on ideas and allocate risks. Without expected rents, there will be underinvestment in inventive effort, and therefore a slowdown in the growth engendered by innovation. Second, society should not prohibit independent implementation. If I did not learn from you, there is no wrongful taking of information, and thus no basis for restraining my inventive and commercial activity, especially since the efficiency cost of doing so is so large.

The natural thought is that we would like to reformulate intellectual property rights so that the arrow in the property mapping points only to the idea itself – the abstract specification or algorithm – and not to the entire equivalence class of its possible instantiations. The distortions of the current patent regime arise precisely because the latter move extends beyond rewarding discovery into forbidding implementation. If we confine the property claim to the idea alone, then the appropriate institutional mechanism is a market in which ideas can be bought and sold at competitively discovered prices, just as with any other form of property.

This would allow those who generate useful ideas to be rewarded – satisfying the first desideratum – since they are paid by those who make use of the idea. At the same time, if someone independently rediscovered and implemented the same idea without having purchased it, they would be free to do so at no cost, satisfying the second desideratum.

The obvious difficulty, and the reason such a system does not emerge spontaneously in the free market, lies in Arrow’s information paradox: to value an idea you must know it, but once you know it, you no longer need to pay for it[viii]. This informational asymmetry represents a market failure, which suggests that there is scope for a policy intervention by the government, in subsidising or facilitating a market for the exchange of ideas. It is the institutional design of such a mechanism to which I now turn.

The Proposal

To address the limitations of patents while preserving incentives, this paper proposes a Federal Idea Exchange (FIX), a federally chartered market institution (perhaps under the U.S. Patent and Trademark Office) for ideas to be discovered, verified, priced and traded, without conferring blanket monopolies over implementation. FIX operates with the following mechanisms.

Verifiable but Obfuscated Disclosure

An inventor wishing to sell or license an idea registers (for a fee, to prevent frivolous submissions) an obfuscated description that establishes novelty and plausibility without revealing full details. She publishes a specification of what she claims the invention achieves, along with hash-based proofs or minimal working prototypes. The FIX registry timestamps the submission and stores the complete design in encrypted form, using a blockchain or similar technology. This addresses the lemons problem[ix] by providing potential buyers with credible signals of quality while protecting the inventor’s secret until a contract is in place.

Prediction Markets with Licensed Third-Party Evaluators

To price entries, FIX licenses third-party evaluators who, under strict fiduciary and liability regimes, can access full designs under nondisclosure. Each listing is paired to standardised prediction markets in which the evaluators trade, that resolve on pre-registered tests relating to whether the design will meet the stated performance threshold, whether bidders will be satisfied, whether challenges will invalidate the claim, and so on. A continuous market maker supplies liquidity[x], ensuring the market yields efficient probability estimates for each question. These probabilities are publicly inspectable.

Escrow and Due Diligence

On the basis of the information revealed in these prediction markets, interested buyers can bid for the right to inspect the full design under a non-disclosure agreement. An escrow intermediary – publicly regulated but privately operated – holds payment while experts verify that the buyer has received the information promised. Payment could be structured in tranches linked to milestones, similar to venture capital staging. If the buyer rejects the idea after inspection, the escrow returns the funds and the idea remains available; repeated false claims would damage the seller’s reputation – her future designs may be penalised in their FIX prediction markets, for instance.

This mechanism mimics early-stage venture capital markets, where investors bear risk based on limited disclosure and mitigate it through contracts, staged investment and reputational mechanisms.

Independent Invention and Compulsory Licensing

Unlike patents, the market would not grant a monopoly over implementation. If another inventor independently discovers the same idea and registers it, both are free to practice and compete. To reward the first discoverer while respecting fairness, the law requires that anyone who learned of the idea through the registry pay a royalty or licensing fee. The registry itself creates an auditable evidentiary trail of knowledge transfer, since it timestamps and logs when an idea is inspected. Royalty rates could be negotiated or set statutorily, drawing on existing experience with compulsory licensing in antitrust and standard-essential patents. If an inventor uses the idea without having accessed the registry (for instance, through independent discovery), no royalty is owed.

This rule aligns property rights with causal knowledge transfer: you owe compensation only if your knowledge came from someone else. Such a defence would protect independent inventors and encourage competition; it also stimulates innovation, by reducing the fear of inadvertent infringement and associated litigation costs.

Evaluation Methods

Assessing the effectiveness of FIX requires both quantitative and qualitative methods. Key indicators include changes in R&D investment levels, number and diversity of ideas registered, and subsequent commercialization outcomes compared to patent-intensive sectors. Prediction market accuracy can be measured by ex post verification of claimed performance, while transaction data reveal liquidity and pricing efficiency. Surveys of participating firms and inventors provide evidence on trust, perceived fairness, and litigation avoidance. Comparative studies against patent litigation costs and innovation rates can establish net welfare gains, taking into account the cost to the government of administering the policy. Finally, independent invention claims offer a natural test of whether knowledge transfer rules function as intended.

Conclusion

FIX restructures intellectual property by decoupling discovery rewards from implementation monopolies. This materially reduces the deadweight loss from patent troll litigation while preserving and increasing innovation incentives through competitive price discovery. The result should be faster technological progress, reduced barriers to entrepreneurship, and more efficient allocation of R&D resources – achieving Haber's vision of property rights fostering growth, but without the systematic inefficiencies of the existing patent system.

Endnotes & References

[i] Haber, S. (2016). Patents and the Wealth of Nations. George Mason Law Review, 23(4), 811-835. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2776773

[ii] Tabarrok, A. (2011). Launching The Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast. TED Books.

[iii] Merton, R. K. (1961, October 13). Singletons and Multiples in Scientific Discovery: A Chapter in the Sociology of Science. American Philosophical Society, 105(5), 470-486.

[iv] Cotropia, C. A., & Lemley, M. A. (2009). Copying in Patent Law. North Carolina Law Review, 87, 1421.

[v] Cohen, L., Gurun, U., & Kominers, S. D. (2019, December). Patent Trolls: Evidence from Targeted Firms. Management Science, 65(12), 5461-5486.

[vi] Bessen, J., & Meurer, M. J. (2014, January 2). The Direct Costs from NPE Disputes. Cornell Law Review, 99, 386-424.

[vii] Hu, A. G., & Png, I. (2013, July). Patent rights and economic growth: evidence from cross-country panels of manufacturing industries. Oxford Economic Papers, 65(3), 675-698. doi:https://doi.org/10.1093/oep/gpt011

[viii] Arrow, K. J. (1962). Economic Welfare and the Allocation of Resources for Invention. In The Rate and Direction of Inventive Activity: Economic and Social Factors (pp. 609-626). Princeton University Press.

[ix] Akerlof, G. (1970, August). The Market for "Lemons": Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 84(3), 488-500. doi:https://doi.org/10.2307/1879431

[x] e.g., as in Hanson, R. (2007). Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation. Journal of Prediction Markets, 1(1), 3-15. Retrieved from https://mason.gmu.edu/~rhanson/mktscore.pdf

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