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Article Excerpt
We develop a model that clarifies the respective advantages and disadvantages of academic and private-sector research. Rather than relying on lack of appropriability or spillovers to generate a rationale for academic research, we emphasize control-rights considerations, and argue that the fundamental tradeoff between academia and the private sector is one of creative control versus focus. By serving as a precommitment mechanism that allows scientists to freely pursue their own interests, academia can be indispensable for early-stage research. At the same time, the private sector's ability to direct scientists toward higher-payoff activities makes it more attractive for later-stage research.
1. Introduction
Many important innovations, in industries ranging from pharmaceuticals to computer technology, have their origins in publicly funded research conducted at universities, foundations, and other nonprofit institutions. The traditional case for government funding of such academic research, as articulated by Nelson (1959) and Arrow (1962), is a familiar one: because of knowledge spillovers and imperfect intellectual-property-rights (IPR) protection, the economic value associated with certain kinds of ideas cannot be fully appropriated by the developers of these ideas, leading to private-sector underinvestment in "basic" research.
In recent years, there has been a substantial expansion of formal IPR protection for early-stage research. This trend is in part a result of the Bayh-Dole Act of 1980, which gives academic institutions the right to patent and commercialize discoveries made with government-sponsored research support, and which has helped to launch a boom in the creation of university technology transfer offices. Lach and Schankerman (2004) report that the number of patents granted to university scientists increased from 500 in 1982 to more than 3100 in 1998. (1)
According to the traditional view, one might expect this trend toward increased IPR protection to be a largely beneficial one. After all, if academia is thought of as a second-best solution to the underinvestment problem caused by insufficient appropriability, then increased appropriability and a shift of research activity to the private sector should be efficiency enhancing. However, the trend has been controversial, particularly in fields such as biotechnology and pharmaceuticals. Many authors have expressed the concern that innovation in these fields is ultimately held back, rather than encouraged, when IPR protection is granted to the sorts of ideas that have traditionally been left in the public domain. Heller and Eisenberg (1998) talk of an "anti-commons" effect associated with early IPR protection, arguing that "a proliferation of intellectual property rights upstream may be stifling life-saving innovations further downstream in the course of research and product development." (2)
In this article, we develop a model that (i) clarifies the respective advantages and disadvantages of academic and private-sector research and (ii) allows one to say when--in the process of developing an idea from its very earliest stages to a finished commercial product--it is normatively optimal to make the transition from academia to the private sector. Unlike the traditional literature, our model does not rely on imperfect appropriability to generate a role for academia. This is not to say that appropriability considerations are not important in some cases; certainly, there are many sorts of early-stage ideas where IPR protection is simply not feasible. Nevertheless, in fields like biotechnology, it is becoming increasingly evident that a lack of available IPR protection is not the only relevant factor in thinking about the merits of academia versus the private sector. Moreover, although arguments based on imperfect appropriability make clear the need for basic research to be subsidized, they are less clear on why this subsidy needs to happen in a different organizational form--that is, in a university, as opposed to in a private corporation.
Our model is based on authority and control-rights considerations, and emphasizes what we believe to be a fundamental tradeoff between academia and the private sector, namely the tradeoff of creative control versus focus. We take the defining characteristic of academic research to be that scientists retain the decision rights over what specific projects to take on, and what methods to use in tackling these projects. Indeed, in our model, academia effectively boils down to a commitment mechanism that ensures scientists that these decision rights will not be abrogated. In contrast, the defining characteristic of private-sector research is that decision rights inevitably reside with the owner/manager of the firm, who can (and will) largely dictate project choice and methods to the individual scientists who work for the firm.
More specifically, following Aghion and Tirole (1997), and in the general spirit of the property-rights literature (Grossman and Hart, 1986; Hart and Moore, 1990; Hart, 1995), we argue that scientists value creative control, and will have to be paid a wage premium in order to give it up. This assumption receives striking support in recent empirical work by Stem (2004), who studies the job market for recent PhDs in biology. By using multiple job offers, Stem is able to control for differences in ability across job candidates. After doing so, he finds that wages are substantially lower in jobs that promise scientists either some freedom to pursue their own individual research agendas, or that encourage the publication of this work.
Thus, one advantage of academia is that scientists can be hired more cheaply than in the private sector. The disadvantage of academia, however, is that they may end up working on projects that they find interesting, or prestige enhancing, but that have little immediate economic value. In contrast, firms can, by virtue of their control rights, direct scientists to work on those projects that have the highest economic payoffs.
It turns out that the resolution of this tradeoff depends crucially on how far from commercialization a particular line of research is. To be concrete, imagine a line of biotech research which consists of ten distinct stages, and which will yield a drug worth $10 billion if and only if all ten stages are successfully completed. At the final stage, so close to an enormous potential payoff, the wages of individual scientists are relatively insignificant, and the most important consideration is simply ensuring that every available scientist is working on the task at hand, as opposed to on some other pet project. Thus, the directedness advantage of the private sector looms large, and it is optimal to have the project be privately owned at the last stage.
Now consider things from the perspective of the very first stage of the research line. It may be that even if this first stage is successful, there is only a one-in-a-thousand chance that all nine of the subsequent stages will be also. So loosely speaking, the value of succeeding in the first stage is only on the order of $10 million. In this case, it becomes much more important to cede creative control, so as to economize on scientists' wages: if private-sector scientists cost $200,000 each per year, and academic scientists cost only $100,000 each per year, it may well be better to locate the project in academia, even if this entails some probability of the scientists wandering off in other directions.
Thus, our primary contribution is to provide a simple account of why it can be socially optimal to have earlier-stage, more "basic" research take place in academia, without relying on spillovers, differences in IPR protection, or any of the other frictions that are usually invoked to rationalize a role for public funding of research. In so doing, we are able to offer a precise description of the potential costs associated with any anti-commons effect. If, for whatever reason, a research line transitions to the private sector sooner than is socially optimal, the inefficiency is manifested in the fact that--because of the higher wages--a private firm may employ too few scientists to work on the line, relative to what would happen in academia.
We then go on to explore several extensions of the basic model. The first of these considers the possibility of research lines "branching out"--that is, giving rise to multiple potential directions for further work, some of which are nearer to commercial payoff than others. To be specific, suppose that there are two potentially legitimate research projects that make use of a firm's patented idea. One is an "applied" project that is only two stages away from a commercial payoff, while the other is a more "basic" project that is five stages away from any payoff. It is possible that the ultimate payoff on the latter, more basic project is sufficiently high that, evaluated at academic-sector wages, it is not only positive net present value (NPV), but of greater NPV than the applied project. At the same time, it is also possible that, evaluated at private-sector wages, the basic project is negative NPV, for the reasons described above. If this is the case, then when a private-sector firm has the decision rights, it will allocate all of its scientists to the applied project, and completely ignore the basic project. (3)
By contrast, if the private firm had never acquired the patent, and the ideas were left freely available to academic scientists, there would naturally tend to be some progress on both projects, as individual scientists followed their own interests. Moreover, the resources invested in each of the two projects would be positive NPV, because they would now each be evaluated at academic-sector wages. There would still be some deviation from the first best inherent in this outcome--without the ability to direct scientists, academia can never ensure the optimal allocation of scientists across the two projects--but this might be better than the private solution, which simply shuts down the basic project.
Another set of extensions looks at hybrid governance structures that lie...
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