Contracting Over The Disclosure of Scientific Knowledge

Contracting over the Disclosure of Scientific
Knowledge: IP Protection and Academic

Publication
Joshua Gans, Fiona Murray & Scott Stern

London Business School Seminar
December 2010
Saturday, 4 December 2010

Process of Growth

Process of Growth
t
A

Increase in
Knowledge

Process of Growth
xt
New Goods
at t
t
A

Increase in
Knowledge

Process of Growth
xt Increased
New Goods
at t
Productivity
t
A

Increase in
Knowledge

Process of Growth
xt Increased
New Goods
at t
Productivity
t
A

Increase in
Knowledge
δ H A (At + A t )
  
R&D Productivity

Process of Growth
xt Increased
New Goods
at t
Productivity
t
A

Increase in
Knowledge
δ H A (At + A t )  t +1
A
   
Future Knowledge
R&D Productivity

Process of Growth
xt Increased
New Goods
at t
Productivity
t
A Appropriated

Increase in
Knowledge
δ H A (At + A t )  t +1
A
   
Future Knowledge
R&D Productivity

Process of Growth
xt Increased
New Goods
at t
Productivity
t
A Appropriated

Increase in
Knowledge
δ H A (At + A t )  t +1
A
   
Future Knowledge
R&D Productivity
Spillover

Interaction between commerce and science

• Widespread and longstanding concern that ‘commercial interests’ hinder

open science
• Anti-commons movement (Heller & Eisenberg)
• Evidence of IP protection correlated with less intense academic activities
(Murray & Stern, 2007; Murray, Aghion et al, 2009)
• Evidence of IP protection correlated with fewer commercial applications
(Williams, 2010)
• Cf: Increase in number of scientists publishing and patenting (Murray 2002;
Azoulay, et.al., 2009)

• Widespread and longstanding concern that ‘commercial interests’ hinder

open science
• Anti-commons movement (Heller & Eisenberg)
• Evidence of IP protection correlated with less intense academic activities
(Murray & Stern, 2007; Murray, Aghion et al, 2009)
• Evidence of IP protection correlated with fewer commercial applications
(Williams, 2010)
• Cf: Increase in number of scientists publishing and patenting (Murray 2002;
Azoulay, et.al., 2009)
• Policy moves to change how academic science uses patents
• Bayh-Dole Act
• Reach through licensing rights
• Academic science as evidence of priority

Stokes’ Classification of Research
Yes
Considerations
of use?
No
No Yes
Quest for fundamental understanding?
Yes
Considerations
of use?
No
No Yes
Yes
Considerations
of use?
No
No Yes
Yes
Considerations
of use?
No
No Yes
Yes
Considerations
of use?
No
No Yes
Yes
Considerations
of use?
No
No Yes
Assumed in
endogenous
Yes growth theory
Considerations
of use?
No
No Yes
Papers associated with patents
#pair with
Funding #papers % paired
patents
Public 235 106 45%
Mixed 70 41 59%
Private 36 24 67%
Starting with publications: From a sample of 341 research publications (all the
research articles from the leading life science journal Nature Biotechnology between
1997 and 1999). Examine which publications are also disclosed in patents. (Murray and
Stern 2007).

Patents associated with publications
#pair with
Funding #patents % paired
papers
Public 1308 1099 84%
Mixed 187 164 88%
Private 2775 1347 49%
Starting with patents: From the full population of human gene patents (US patents
identified using bioinformatics methods that disclose and claim a human gene sequence
or fragment; Jensen and Murray 2005), which patents are also disclosed in
publications? (Huang and Murray 2008 )

Disclosure Paths
• Intellectual property system

• Romer emphasized the fact that when you obtain a patent, the disclosures
in the application can be used for future research
• but … may prefer secrecy to obtaining a patent (Mansfield, Anton & Yao,
Denicolo & Franzoni, Kultti, Takalo & Toikka, Erkal)
• Open science and publication
• Norms (Merton) and incentives (Dasgupta & David)
• Intrinsic preferences (Stern; Aghion, Dewatripont & Stein)
• Both paths involve choices and form part of a disclosure strategy

S

S

S
Customers

S
Money Customers

Disclosure through publication
S
Money Customers

F
Money Customers

Knowledge
S
F
Money Customers

S Knowledge Imitator
F
Money Customers

F Money Customers

Disclosure through patents
F Money Customers

F Money Customers

F Money Customers

F Money Customers

This paper ...

This paper ...
• Research contribution: endogenise the choice of disclosure strategy as

negotiated between scientists and their funders

This paper ...
• Research contribution: endogenise the choice of disclosure strategy as

negotiated between scientists and their funders
• Key output is to understand interaction between patenting and publication
• What are the economic forces driving knowledge disclosure?
• A missing micro-foundation for endogenous growth theory and a
missing theory of patent-paper pairs
• Are patents and publications complements or substitutes?
• Complementarity is assumed and necessary in endogenous growth
• Substitutability is the concern at the heart of policy debates

… results

… results
• Baseline conclusion: several fundamental drivers of complementarity between

patents and publication
• Congruence (overlap in patent/publication disclosures)
• Competitive protection (effective patents block entry providing insurance
against entry-promoting disclosures)
• Non-economic payments (patents improve commercial outcomes and
publications are used to reward scientists)

… results

• Dynamic extension: patents may reduce publication incentives

… results

• Dynamic extension: patents may reduce publication incentives
• Design of IP protection
• Stronger IP can increase scientific openness
• But simple disclosure rules and rights have unintended consequences

Key Model Elements

Key Model Elements
• Role of disclosure
• Potentially fosters imitative entry (reducing commercial returns) – can happen
through patent and/or publication disclosures
• Generates scientific kudos (through publication only) although scientists also care
about income
• Patent and publication disclosures might overlap

Key Model Elements
about income
• Disclosure strategy
• Outcome of negotiation between (academic) scientist and firm over payments, IP
strategy and publication rights
• Scientist assumed to be wealth constrained

Key Model Elements
about income
• Disclosure strategy
• Outcome of negotiation between (academic) scientist and firm over payments, IP
strategy and publication rights
• Scientist assumed to be wealth constrained
• Simplifying assumptions
• Single scientist and single firm (bilateral monopoly)
• Single project (more about funding an academic scientist than scientist-employee)
• No outside options (relaxed in the paper)

Choice of disclosure regimes
Publication disclosure (d)

0 D
Commercial Patent-Paper
1
Science Pairs
Patent
(i)
0 Secrecy Open Science

Preferences
• Scientist
U= w + bS d
wage kudos
• Firm (Funder): expected profit of private funder
Π
 − k − w − Pr(Successful Entry)(Π − π )
Monopoly Capital Competitive
Profit Cost Profit
While researchers care about scientific disclosure, investors

care about the impact of disclosures on potential competition

Impact of Patents

Impact of Patents
• Creates cost of workaround

• Additional entry cost: λ

Impact of Patents

• Blocked entry
• Probability entry is prohibited entirely: ρ

Impact of Patents

• Blocked entry
• Disclosures
• Minimum disclosure requirements in the patent: dPAT
• Literally, the probability disclosures yield knowledge that reduces
entry costs by bE

Impact of Patents

• Blocked entry
• Disclosures
• Minimum disclosure requirements in the patent: dPAT
• Literally, the probability disclosures yield knowledge that reduces
entry costs by bE
• Congruence
• Probability patent and publication disclosures overlap: α

Probability of Entry
1

1
π

1
π
(1 − i ρ )π

1
π
(1 − i ρ )π
(1 − i ρ )π − iλ
0

1
π
(1 − i ρ )π
(1 − i ρ )π − iλ + bE Pr(Disclosure)
(1 − i ρ )π − iλ
0

1 Pr (Disclosure)
π
(1 − i ρ )π
(1 − i ρ )π − iλ
0

1 Pr (Disclosure)
= (1 − α ) ( i Pr (Learn from Patent)+Pr(Learn from Pub))
π + α i Pr(Learn from Either)
(1 − i ρ )π
(1 − i ρ )π − iλ
0

1 Pr (Disclosure)
= (1 − α ) ( idPAT + d ) + α ( idPAT + d − idPAT d )
(1 − i ρ )π
(1 − i ρ )π − iλ
0

1 Pr (Disclosure)
= (1 − α ) ( idPAT + d ) + α ( idPAT + d − idPAT d )
(1 − i ρ )π = idPAT + d − α idPAT d
(1 − i ρ )π − iλ
0

1
π
(1 − i ρ )π
(1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)
(1 − i ρ )π − iλ
0

1 1
(1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)
0 0

1 1
Random
(1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d) Fixed
Cost, θ
0 0

1 1
Random
(1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d) Fixed
= Pr (entry) Cost, θ
0 0

Expected Profits
Π
 − k − w − Pr(successful entry)(Π − π )
Monopoly capital Competitive
Profit cost Profit

Expected Profits
Π
Profit cost Profit
Pr (successful entry)
= (1 − i ρ )Pr(entry)
= (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d))

Expected Profits
Π
Profit cost Profit
Pr (successful entry)
= (1 − i ρ )Pr(entry)
= (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d))
The potential for entry is increasing in both patenting and publication

disclosure, while the cost of entry may or may not rise if there is a patent.

Easy Case: Complete Overlap
• Suppose that the

knowledge disclosed in a Returns
patent and publication were to i
exactly the same.
• Then if decide to patent, Patent-Paper Pairs
there is no additional cost
in publishing and vice
versa.
• Would only observe secrecy Secrecy
and patent-paper pairs.
Returns
to d

Negotiations
• Use the Nash bargaining solution

• Negotiate over w, i and d ∈ [0, D]
• Patent (i) and publication (d) used to increase surplus
• Wages (w) used to distribute surplus
• Technical issue: wages cannot be negative
• When w > 0, choose i and d to maximise total surplus
• But if w = 0, total surplus not maximised
• As increase d, reduce w: if bS relatively high may want zero wages
• This occurs if
Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE idPAT ) (Π − π )
D>d=
bS + bE (1 − i ρ )(1 − α idPAT )(Π − π )

Total Surplus Maximisation (d)
• Assume that D < d

• Choose i and d to maximise:
bS d + Π − k − (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d)) (Π − π )
• Disclosure Choice: set d = D if


bS ≥ (1 − i ρ )bE (1 − α idPAT )(Π − π )


bS ≥ (1 − i ρ )bE (1 − α idPAT )(Π − π )
bS
Δd ≡ ≥ (1 − i ρ )(1 − α idPAT )
bE (Π − π )


bS ≥ (1 − i ρ )bE (1 − α idPAT )(Π − π )
bS
Δd ≡ ≥ (1 − i ρ )(1 − α idPAT )
bE (Π − π )


bS ≥ (1 − i ρ )bE (1 − α idPAT )(Π − π )
bS
Δd ≡ ≥ (1 − i ρ )(1 − α idPAT )
bE (Π − π )
More likely to be satisfied if there is a patent.

Total Surplus Maximisation (i)

• Patent Choice: set i = 1 if


Π − k − (1 − ρ ) ( (1 − ρ )π − λ + bE dPAT ) (Π − π )
Δi ≡ ≥1
Π − k − π (Π − π )


Π − k − (1 − ρ ) ( (1 − ρ )π − λ + bE dPAT ) (Π − π )
Δi ≡ ≥1
Π − k − π (Π − π )
Can show that publication means that a patent may

be chosen even if Δi < 1.

Complementarity
Δi
Commercial Patent-Paper Pairs
Science
Open
Secrecy
Science
Δd

Sources of Complementarity
• Congruence (α): as α increases, this increases patent-paper pairs relative to

other regimes.
• Intuition: the marginal cost of disclosure is lower if there is a patent as less
entry-facilitating knowledge is likely to be generated.
• Patent effectiveness (ρ): as the effectiveness of a patent in blocking entry
rises, this increases patent-paper pairs relative to other regimes.
• Intuition: if a patent can actually block entry (ρ = 1), the disclosures are not
commercially harmful.
• Patent breadth (λ): as patent breadth increases, this increases patent-paper
pairs relative to other regimes.
• Intuition: patents more effective at reducing entry so more likely to be
chosen reducing the marginal cost of publication disclosure.

Independent Choices
• Suppose d and dPAT revealed

information about distinct Δi
knowledge (α = 0)
• Suppose patent protection Commercial Patent-Paper
Science Pairs
ineffective in blocking entry (ρ = 0)
• When Δd > 1, surplus
maximisation would involve d = D 1
• Wages always zero (the outside
option) when there is publication Secrecy
Open
Science
• Decisions do not interact.
1 Δd

Possibility of Zero Wages
• D>d
• If publishing maximises joint surplus, w = 0
• Increase d until wage is constrained
• Beyond this point, d used as compensation.
d =
* ( )
Π − k − (1 − iρ ) (1 − iρ )π − iλ + bE id PAT (Π − π )
• Increasing λ and ρ i
2(1 − iρ )bE (1 − α id PAT )(Π − π )
• More likely to take out a patent
• If there is publication, negotiate more disclosure
• Increasing dPAT
• Less likely to take out a patent
• If there is a publication, increases disclosure
Stronger IP protection (higher λ and ρ) stimulates open science.

Higher dPAT may not increase disclosure if it causes strategy to
move to secrecy.

Dynamic Extension

Dynamic Extension
 Suppose that scientists and firms live two periods
 Overlap with other generations
 Future kudos generated by citation as well as publication
 Assume away sources of complementarity (α = ρ = 0) but otherwise same
model

Dynamic Extension
model
 Past knowledge reduces future capital costs, k
 Full transfer (under contracting): zero future costs
 Partial transfer (through publication): (1-dt-1)k

Dynamic Extension
model
 Past knowledge reduces future capital costs, k
 Full transfer (under contracting): zero future costs
 Partial transfer (through publication): (1-dt-1)k
 Firm owns patent and can license it to next generation
 Disclosure, fee & wages now a 3-way negotiation
 Use Nash bargaining solution
 Past publication gives future pair an easier work-around if there is no license –
work-around possible (on same research path) with probability γ.
 However, if work-around then do not cite previous work.

S

Old

Old New

Old New
S S

Old New
S S
F F

Secrecy
Old New
S S
F F

Secrecy
Old New
S S
No flow of
knowledge
F or money F

Secrecy
Old New
S S
No flow of
knowledge
F or money F
Full Costs

Open Science
Old New
S S
F F

Open Science
Old New
S S
Knowledge
F F

Open Science
Old New
S S
Knowledge
F F
Full Transfer

Commercial Science
Old New
S S
F F

Commercial Science
Old New
Knowledge
F
S
S

Commercial Science
Old New
Knowledge
F
S
S
Money
F

Commercial Science
Old New
Knowledge
F
S
S
Money
F
Full Transfer

Patent-Paper Pairs
Old New
S S
F F

Patent-Paper Pairs
Old New
Knowledge
F
S
S

Patent-Paper Pairs
Old New
Knowledge
F
S
S
Money
F

Patent-Paper Pairs
Old New
Knowledge
F
S
S
Money
F
Full Transfer
but partial transfer
if negotiations fail
Patent-Paper Pairs
Old New
Knowledge
F
S
S
Money
Full Transfer
License Negotiations

 Outcomes
 If no patent, τ = 0
 If patent but no publication, τ = k/3
 If patent and past publication, τ = k(1-(1-γ)dt-1)/3

 Outcomes
 If no patent, τ = 0
 If patent but no publication, τ = k/3
 If patent and past publication, τ = k(1-(1-γ)dt-1)/3
 Patent-Paper Pairs
 For δ sufficiently high, patent-paper pairs can be an
equilibrium
 Presence of patent reduces incentives for publication and
vice versa when γ < 1

Licensing cumulative innovation

• Suppose that future research teams build on current innovation


• Disclosures reduce costs to future research teams


• Having a patent, gives current research team an opportunity to extract some
future innovative rents through licensing
• Suppose that licensing is accompanied by full disclosure (no non-
contractibility problem)
• Publication may allow some knowledge transfer even without licensing
• Therefore, publication reduces the future license fee


• As future licensing is only possible with a patent, it follows that stronger
patent incentives may cause a reduction in publication incentives


• As future licensing is only possible with a patent, it follows that stronger
patent incentives may cause a reduction in publication incentives
• This is countered by static publication incentives and also scientist’s desire
for future kudos (through citation)

Substitutability
Δi
Patent-Paper
Commercial Pairs
Science
1
Open
Secrecy
Science
1 Δd

Other implications
• Look only at symmetric dynamic equilibria

• Inter-temporal complementarity
• Only worthwhile publishing if expect future scientific work to be published
(so can earn a citation)
• Therefore, there can exist multiple equilibria with commercial science or
secrecy always an equilibrium under certain conditions.
• Domain of open science is expanded as a result of substitutability

What if scientist owns IP?
Old New
S S
F F

Old New
Knowledge
S
S
F
F

Old New
Knowledge
S
S
F Money
F

Old New
Knowledge
S
S
F Money
F
Full Transfer
Old New
Knowledge
S
S
F Money
Full Transfer
Old New
Knowledge
S
S
F Money
Full Transfer
IP ownership
• Dynamic model assumes that the firm owns the IP rights and negotiates over
the license fee.
• What if the scientist owned those rights?
• It would then care about future publication in order to generate a citation.
• Consequences:
• A reduced future license fee when there is a publication
• In negotiations, the scientist and firm are less likely to publish as this will
reduce license revenues even further
• Openness may be facilitated by leaving IP rights in the firm’s hands.

Key Extensions
• Public funding: impact and restrictions

• Scientific and Commercial Research Racing
• Empirical: Human Genome Project

Conclusions
• Disclosure strategy grounded in bargaining and shaped by the disclosure

environment (kudos and IP protection).
• Patent-paper pairs are a potentially important equilibrium phenomenon and
not an anomaly.
• In most circumstances, increases in the strength of formal intellectual
property protection enhances the scope for patent-paper pairs.
• Important implications for strategy in the context of science-based
innovation.

Contracting Over The Disclosure of Scientific Knowledge

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Contracting Over The Disclosure of Scientific Knowledge

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Contracting over the Disclosure of Scientific

Knowledge: IP Protection and Academic

Joshua Gans, Fiona Murray & Scott Stern

Saturday, 4 December 2010

Saturday, 4 December 2010

Saturday, 4 December 2010

Saturday, 4 December 2010

Saturday, 4 December 2010

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• Widespread and longstanding concern that ‘commercial interests’ hinder

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• Widespread and longstanding concern that ‘commercial interests’ hinder

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Public 235 106 45%

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Public 1308 1099 84%

Mixed 187 164 88%

Private 2775 1347 49%

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• Intellectual property system

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• Research contribution: endogenise the choice of disclosure strategy as

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• Research contribution: endogenise the choice of disclosure strategy as

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• Baseline conclusion: several fundamental drivers of complementarity between

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• Baseline conclusion: several fundamental drivers of complementarity between

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• Baseline conclusion: several fundamental drivers of complementarity between

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Publication disclosure (d)

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• Firm (Funder): expected profit of private funder

While researchers care about scientific disclosure, investors

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• Creates cost of workaround

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• Creates cost of workaround