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92 Tex. L. Rev. 303 (2013-2014)
Beyond the Patents-Prizes Debate

handle is hein.journals/tlr92 and id is 327 raw text is: Beyond the Patents-Prizes Debate
Daniel J. Hemel & Lisa Larrimore Ouellette*
Intellectual property scholars have vigorously debated the merits of
patents  versus  prizes for    encouraging   innovation, with   occasional
consideration of government grants. But these are not the only options.
Perhaps most significantly, the patents-versus-prizes (or patents-versus-prizes-
versus-grants) debate has largely neglected the role of tax incentives in
innovation policy, despite the tens of billions of dollars spent globally on tax
breaks for R&D activities each year. How should R&D-related tax incentives
figure into this debate, and what criteria are relevant for policymakers
selecting among the various tools?
In this Article, we develop a new taxonomy of innovation policies that
allows direct comparisons among patents, prizes, grants, and tax incentives.
This taxonomy highlights the overlooked efficiency benefits of tax credits: like
patents, they elicit privately held information about the expected value of R&D
projects; like grants, they reduce the social-welfare costs of frictions in
imperfect capital markets. Our taxonomy also sheds new light on nonefficiency
dimensions of R&D policy. Grants, tax credits, and prizes generally require all
taxpayers to subsidize R&D regardless of whether they use the resulting
products, whereas the patent system imposes R&D costs primarily upon the
consumers who purchase patented products. In some contexts (e.g., life-saving
drugs), the user-pays aspect of the patent system is difficult to defend on
distributive justice grounds. In other contexts (e.g., luxury goods), the user-
pays aspect of the patent system may make patents normatively preferable in
comparison to alternative incentive mechanisms.
Ultimately, optimal innovation policy will depend on a range of factors
that are likely to vary across contexts. For example, grants may be optimal
where the government has a comparative advantage in evaluating potential
projects, while tax credits may be optimal where potential innovators have
private information about project prospects and limited access to outside
capital.  We argue for a pluralistic approach to innovation policy that
* Daniel Hemel received his J.D. from Yale Law School in 2012 and his M.Phil. from the
University of Oxford in 2009. Lisa Larrimore Ouellette is a Visiting Fellow at the Yale Law
School Information Society Project; she received her J.D. from Yale Law School in 2011 and her
Ph.D. in Physics from Cornell University in 2008. For valuable suggestions, thanks to Michael
Abramowicz, David Abrams, Ian Ayres, Jack Balkin, Andrew Blair-Stanek, Mike Carrier, Tun-
Jen Chiang, Anjali Dalal, Eric Fish, Brett Frischmann, Brian Galle, John Golden, Brad Greenberg,
Eric Hemel, Margot Kaminski, Amy Kapczynski, Michael Knobler, Jeff Larrimore, Mark Lemley,
Jonathan Masur, Benjamin Roin, Heidi Williams, and participants at PatCon 3 at Chicago-Kent
College of Law and at workshops at Stanford Law School and the Yale Law School Information
Society Project.

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