Research on Innovation Working Papers
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Software and software patents
- The Direct Costs from NPE Disputes
- The Private and Social Costs of Patent Trolls, also in Regulation
- A Generation of Software Patents
By James Bessen
Abstract: This report examines changes in the patenting behavior of the software industry since the 1990s. It finds that most software firms still do not patent, most software patents are obtained by a few large firms in the software industry or in other industries, and the risk of litigation from software patents continues to increase dramatically. Given these findings, it is hard to conclude that software patents have provided a net social benefit in the software industry. Boston University Journal of Science and Technology Law (2012). - A Comment on “Do Patents Facilitate Financing in the Software Industry?”
By James Bessen
Abstract: “Do Patents Facilitate Financing in the Software Industry?” by Ronald J. Mann contributes empirical evidence to our understanding of how software startups use patents. However, a close examination of the actual empirical findings in this paper points to rather different conclusions than those that Mann draws, namely: few software startups benefits from software patents and patents are not widely used by software firms to obtain venture financing. Indeed, among other things, the paper reports that 80% of venture-financed software startups had not acquired any patents within four years of receiving financing. - An Empirical Look at Software Patents
By James Bessen and Robert M. Hunt (Federal Reserve Bank of Phila.)
Abstract: U.S. legal changes have made it easier to obtain patents on inventions that use software. Software patents have grown rapidly and now comprise 15 percent of all patents. They are acquired primarily by large manufacturing firms in industries known for strategic patenting; only 5 percent belong to software publishers. The very large increase in software patent propensity over time is not adequately explained by changes in R&D investments, employment of computer programmers, or productivity growth. The residual increase in patent propensity is consistent with a sizeable rise in the cost effectiveness of software patents during the 1990s. We find, evidence that software patents substitute for R&D at the firm level; they are associated with lower R&D intensity. This result occurs mainly in industries known for strategic patenting and is difficult to reconcile with the traditional incentive theory of patents. Journal of Economics and Management Strategy 16, no. 1, pp. 157-89 (2007). - The Software Patent Experiment By James Bessen and Robert M. Hunt (Federal Reserve Bank of Phila.) Proceedings, “Patents, Innovation and Economic Performance,” OECD, April, 2003 and Business Review, Federal Reserve Bank of Philadelphia (2004)
- A Reply to Hahn and Wallsten
By James Bessen and Robert M. Hunt (Federal Reserve Bank of Phila.)
Abstract: A reply to criticism of an early draft of “An Empirical Look at Software Patents.” - What Good is Free Software? By James Bessen in Robert Hahn, editor, Government Policy toward Open Source Software, AEI-Brookings Joint Center for Regulatory Studies, Washington, DC (2002).
- Open Source Software: Free Provision of Complex Public Goods
By James Bessen
Abstract: Open source software, developed by volunteers, appears counter to the conventional wisdom that private provision of public goods is socially more efficient. But complexity makes a difference. Under standard models, development contracts for specialized software may be difficult to write and ownership rights do not necessarily elicit socially optimal effort. I consider three mechanisms that improve the likelihood that firms can obtain the software they need: pre-packaged software, Application Program Interfaces (APIs) and Free/Open Source software (FOSS). I show that with complex software, some firms will choose to participate in FOSS over both “make or buy” and this increases social welfare. In general, FOSS complements proprietary provision, rather than replacing it. Pre-packaged software can coexist in the marketplace with FOSS: pre-packaged software addresses common uses with limited feature sets, while firms with specialized, more complex needs use FOSS. in Jürgen Bitzer and Philipp J. H. Schröder, eds., The Economics of Open Source Software Development, Elsevier B. V. (2006).
Technology history
- Was Mechanization De-Skilling? The Origins of Task-Biased Technical Change
By James Bessen
Abstract: Did nineteenth century technology reduce demand for skilled workers in contrast to modern technology? I obtain direct evidence on human capital investments and the returns to skill by using micro-data on individual weavers and an engineering production function. Weavers learned substantially on the job. While mechanization eliminated some tasks and the associated skills, it increased returns to skill on the remaining tasks. Technical change was task-biased, much as with computer technology. As more tasks were automated, weavers' human capital increased substantially. Although technology increased the demand for skill like today, weavers' wages eventually increased and inequality decreased, contrary to current trends. - More Machines, Better Machines...Or Better Workers?
By James Bessen
Abstract: This paper assesses how much of the rapid growth in labor productivity in nineteenth century cotton weaving arose from capital-labor substitution and how much from technical change. By using an engineering production function and detailed information on major inventions, I find that labor-saving technical change accounts for almost all of the growth. However, much of the labor-saving bias arose not from inventions, but from acquisition of new knowledge and skills by weavers. Moreover, this was endogenous, influenced by wages and prices. This provides a technology-based explanation for the persistent association between economic growth and capital deepening. - Where Have All the Great Inventors Gone? By James Bessen
- The Skills of the Unskilled in the American Industrial Revolution
By James Bessen
Abstract: Were ordinary factory workers unskilled and was technology "de-skilling" during the Industrial Revolution? I measure foregone output to estimate the human capital investments in mule spinners and power loom tenders in ante-bellum Lowell. These investments rivaled those of craft apprentices, suggesting a different view of industrial technology. Accounting for skill, multi-factor productivity growth was negligible, contrary to previous findings. From 1834-55, firms made increasing investments in skill, allowing workers to tend more machines and generating rapid growth of per-capita output. This growing investment was motivated partly by changing factor prices and more by a changing labor supply. Calculations show that firm policy and social conditions, including literacy, influenced the investment in factory skills. When skills are considered, technological change at Lowell appears as a broad social process, dependent as much on innovation in institutions as on invention of machines. “Technology and Learning by Factory Workers: The Stretch-Out at Lowell, 1842,” Journal of Economic History (2003).
Performance of patents and property systems
- Imperfect Property Rights
By James Bessen
Abstract: In theory, property rights allow markets to achieve Pareto optimal allocations. But the literature on contracting largely ignores what happens when property rights are imperfectly defined and enforced. Although some models include weak enforcement or poorly defined rights or "anticommons," this paper develops a general model that includes all of these possibilities. I find that combinations matter: policy prescriptions to remedy individual imperfections are sometimes inappropriate under other conditions. For example, stronger penalties for violating rights can decrease Pareto efficiency, contrary to a common view. Also, collective rights organizations, such as patent pools, sometimes worsen problems of overlapping claims. - Evaluating the Economic Performance of Property Systems
By James Bessen
Abstract: How should the economic performance of property systems be evaluated? Benefit-cost analysis is widely used to evaluate non-market based regulation when prices are not available. Market prices provide better information for property systems, but market prices are not necessarily socially optimal when property rights are imperfect. This paper discusses two practical approaches to evaluating the performance of property systems, one based on an analysis of institutional performance, the other based on measuring incentives. As an illustration, I show how these approaches might be used to evaluate the US patent system. Review of Law and Economics, Vol. 5 : Iss. 1, Article 1. (2009) - Do Patents Perform Like Property?By James Bessen and Michael J. Meurer
Abstract: Do patents provide critical incentives to encourage investment in innovation? Or, instead, do patents impose legal risks and burdens on innovators that discourage innovation, as some critics now claim? This paper reviews empirical economic evidence on how well patents perform as a property system. Academy of Management Perspectives, (2008), 22(3), pp. 8-20; see also, “Of Patents and Property,” Regulation, 31(4), pp. 18-27 (2008). - What's Wrong with the Patent System? Fuzzy Boundaries and the Patent TaxBy James Bessen and Michael J. Meurer First Monday, volume 12, number 6 (June 2007)
- Estimates of Patent Rents from Firm Market Value
By James Bessen
Abstract: The value of patent rents is an important quantity for policy analysis. However, estimates in the literature based on patent renewals might be understated. Market value regressions could provide validation, but they have not had clear theoretical foundations for estimating patent rents. I develop a simple model to make upper-bound estimates of patent rents using regressions on Tobin's Q. I test this on a sample of US firms and find it robust to a variety of considerations. Estimates from market value regressions correspond well with estimates based on patentee behavior generally, but renewal estimates might be understated for pharmaceuticals. Research Policy, (2009), v. 38, pp. 1604-16. - The Value of U.S. Patents by Owner and Patent Characteristics
By James Bessen
Abstract: This paper uses renewal data to estimate the value of U.S. patents, controlling for patent and owner characteristics. Estimates of U.S. patent value are substantially larger than estimates for European patents, however, the ratio of U.S. patent value to R&D for firms is only about 3%. Patents issued to small patentees are much less valuable than those issued to large corporations, perhaps reflecting imperfect markets for technology. Litigated patents are more valuable, as are highly cited patents. However, patent citations explain little variance in value, suggesting limits to their use as a measure of patent quality. Research Policy, 37 (2008), pp. 932-45. - Intellectual Property on the Internet: What's Wrong with Conventional Wisdom? By James Bessen and Eric S. Maskin, Institute for Advanced Study German version appears in Lutterbeck, Bernd, Robert A. Gehring, and Matthias Bärwolff eds., Open Source Jahrbuch 2005: Zwischen Softwareentwicklung und Gesellschaftsmodell, Berlin: Lehmanns Media (2005)
Patent litigation
- The Direct Costs from NPE Disputes
- The Private and Social Costs of Patent Trolls, also in Regulation
- The Private Costs of Patent Litigation
By James Bessen and Michael J. Meurer
Abstract: This paper estimates the total cost of patent litigation to alleged infringers. We use a large sample of stock market event studies around the date of lawsuit filings for US public firms from 1984-99. We find that the total costs of litigation are much greater than legal fees and costs are large even for lawsuits that settle. Lawsuits cost alleged infringers about $28.7 million ($92) in the mean and $2.9 million in the median. Moreover, infringement risk rose sharply during the late 1990s to over 14% of R&D spending. Small firms have lower risk relative to R&D. - Patent Litigation with Endogenous Disputesby James Bessen and Michael J. Meurer American Economic Review, 96, no. 2, pp. 77-81 (2006).
- Lessons for Patent Policy from Empirical Research on Patent Litigation
By James Bessen and Michael J. Meurer
Abstract: This Article reviews empirical patent litigation research to reveal patent policy lessons. First, the Article presents facts about patent litigation. Next, it analyzes the patent premium. Patent litigation research reveals little about the magnitude of the patent premium, but the research reveals the strategies firms use to capture the patent premium and the patent policy instruments that determine the patent premium. Next, the Article evaluates the patent prosecution process and notes that making efforts to refine a patent application can affect the value of the patent. The Article then identifies reforms for improving PTO performance. Finally, the Article discusses policy changes that patent litigation research suggests would improve procedural fairness and reduce patent litigation costs. 9 Lewis and Clark Law Review 1 (2005) - The Patent Litigation Explosion
By James Bessen and Michael J. Meurer
Abstract: This paper provides the first look at patent litigation hazards for public firms during the 80s and 90s. Consistent with our model, litigation is more likely when prospective defendants spend more on R&D, when prospective plaintiffs acquire more patents and when firms are larger and technologically close. Public firms face dramatically increased hazards of litigation as plaintiffs and even more rapidly increasing hazards as defendants, especially for small public firms. The increase cannot be explained by patenting rates, R&D, firm value or industry composition. Legal changes are the most likely explanation.
Technological change
- Communicating Technical Knowledge
By James Bessen
Abstract: In patent theory, the cost of communicating technical knowledge is small. In human capital theory, it is large. But evidence suggests that these costs are actually endogenous. Firms invest in reducing communication costs, but only when technology is sufficiently advanced. This can make competition different for early stage technologies: patents do not increase innovation incentives, employee mobility matters and inventors might choose to freely exchange knowledge. Behavior and optimal policy differ then. Endogenous communication costs help explain changes in patent propensity, in the geographic localization of innovation and why successful developing countries have difficulty moving to the innovation frontier. - Accounting for Productivity Growth When Technical Change is Biased
By James Bessen
Abstract: Solow (1957) decomposed labor productivity growth into two components that are independent under Hicks neutrality: input growth and the residual, representing technical change. However, when technical change is Hicks biased, input growth is no longer independent of technical change, leading to ambiguous interpretation. Using Solow’s model, I decompose output per worker into globally independent sources and show that technical bias directly contributes to labor productivity growth above what is captured in the Solow residual. This contribution is sometimes large, generating rates of total technical change that substantially exceed the Solow residual, prompting a reinterpretation of some well-known studies. - Real Options and the Adoption of New Technologies
By James Bessen
Abstract: New technologies typically improve over time. Firms adopting new technologies expect future vintages to be superior, and, with free entry, to bring lower prices. Hence firms may value the option to wait before making irreversible investment. Traditional means of accounting for obsolescence do not fully capture these considerations. This paper develops a real options model for investment in new technology. Even modest rates of incremental improvement lead firms to raise investment thresholds substantially. This typically delays first adoption for many years. Thresholds are affected by the rate of productivity improvement, interest rates, demand growth and price uncertainty. As an application, investment thresholds are calculated for the adoption of new spinning technology in the British cotton industry at the turn of the century. - Technology Adoption Costs and Productivity Growth: The Transition to Information Technology
By James Bessen
Abstract: Using two panels of U.S. manufacturing industries, this paper estimates capital adjustment costs from 1961 to 1996. I find that from 1974-83 adjustment costs rose sharply—they more than doubled from about 3% of output to around 7%. Moreover, this increase is specifically associated with a shift to investment in information technology. But such large adoption costs imply that the Solow residual mismeasures productivity growth: adoption costs are resource costs representing an unmeasured investment. I find that when this investment is included, productivity grew about 0.4% per annum faster than official measures during the 70's and early 80's, reducing the size of the productivity “slowdown.” Indeed, estimated productivity growth rates were roughly the same from 1974-88 as from 1949-73. Thus technology transitions critically affect productivity growth measurement. Review of Economic Dynamics (2002). - Productivity Adjustments and Learning-by-Doing as Human Capital
By James Bessen
Abstract: This paper measures plant-level productivity gains associated with learning curves across the entire manufacturing sector. We measure these gains at plant startups and also after major employment changes. We find: 1.) The gains are strongly associated with a variety of human capital measures implying that learning-by-doing is largely a firm-specific human capital investment. 2.) This implicit investment is large; many plants invest as much in learning-by-doing as they invest in physical capital and more than they invest in formal job training or R&D. 3.) This investment differs persistently over industries and is higher with greater R&D; hence measured returns to R&D may be overstated. 4.) Consistent with a search model, the human capital investment is much larger following employment decreases than increases. We conclude that learning-by-doing is a major factor in wage determination, the adoption of new technologies and asymmetric employment adjustment costs. Discussion Paper 97-17 by the Center for Economics Studies, U. S. Census Bureau (1997)
Patent theory
- Patent Thickets: Strategic Patenting of Complex Technologies
By James Bessen
Abstract: Patent race models assume that an innovator wins the only patent covering a product. But when technologies are complex, firms may build “thickets” of patents covering product markets and assert them aggressively. Then innovators share rents with other patentholders under cross-licenses, making R&D incentives sub-optimal. On the other hand, first mover advantages may provide stronger, even optimal, R&D incentives as long as firms pursue patent strategies of “mutual non-aggression.” I find that firms license aggressively when patenting standards are low, especially incumbent firms in mature industries. But high patenting standards encourage non-aggressive strategies that are critical for strong R&D incentives. - Patents and the Diffusion of Technical Information
By James Bessen
Abstract: Does the disclosure requirement of the patent system encourage the diffusion of inventions? This paper builds a simple model where firms choose between patents and trade secrecy to protect inventions. Diffusion is not more likely with a patent system nor is the “market for technology” necessarily greater. Economics Letters, v. 86, no. 1, pp. 121-128 (2005). - Hold-up and Patent Licensing of Cumulative Innovations with Private Information
By James Bessen
Abstract:When innovation is cumulative, early patentees can hold up later innovators. Under complete information, licensing before R&D avoids holdup. But when development costs are private information, ex ante licensing may only occur in regimes with sub-optimal patent policy. Economics Letters 82, No. 3, pp. 321-26 (2004). - Sequential Innovation, Patents and Imitation
By James Bessen and Eric S. Maskin, Institute for Advanced Study
Abstract: How could industries such as software, semiconductors, and computers have been so innovative despite historically weak patent protection? We argue that if innovation is both “sequential” (each invention builds on its predecessor) and “complementary” (a diversity of innovators raises the chances of discovery), a firm's profit may actually be enhanced by competition, and a patent system may interfere with such competition and with innovation. A natural experiment in the software industry and the positive relationship between innovation and firm entry provide support for our model. (Original 2000 version) RAND Journal of Economics (2009) 40(4) pp. 611-35. (auf Deutsch)
