Saturday, 1 October 2011

Interview with Daron Acemoglu

The September 2011 issue of The Region has an interview with the MIT economist Daron Acemoglu on tech innovation, inequality and dynamics of political economy.
Region: A related question, about intellectual property rights and innovation, jumps back to your discussion of Apple and patent infringement. In a recent paper, you suggested that optimal policy regarding IPR protection is “state-dependent.” The idea is that patent or IPR protection should be strongest for competitors that have their greatest advantage over their competitors or their rivals. That seems kind of counterintuitive to me, but your explanation is intriguing—it relies on dynamic incentives and the sort of “trickle down” effect you were just touching on. Can you explain your thinking on this?

Acemoglu: Yes, it is sort of a counterintuitive result—and not what we were expecting when we started working on this. In fact, our intuition was the opposite, so it’s one of the places where you sort of are surprised.

We started with a model that is very traditional, in some sense, for this set of questions. It has two companies within each sector that compete, and they’re trying to improve over each other. We thought that it would be a great idea to cut the leads of companies that are farther ahead of others. If Microsoft, or Apple, is very far ahead of its rivals, that will discourage the rivals. They’ll think,

“Well, we’re never going to catch up with Apple; we might as well give up.” And Apple itself reduces research because part of the reason it was doing R&D was to rise above its rivals and be able to charge higher prices than its rivals. Well, if the rivals aren’t doing R&D, then they’re not much of a threat to Apple, so then they don’t do as much.

So we thought, “Ah, well, then it would be a great thing to say, ‘If Apple is so far ahead of its rivals, let’s get rid of its IPR protection, so it brings them closer, and then once they are closer, they’ll all start running faster.’” So that was our intuition.

And it turns out, that intuition is not correct. And the reason it’s not correct is because if you do that—if you get rid of the IPR protection—the cost is not so much that you discourage Apple today, but you discourage companies that were trying really hard to build a lead over their rivals in order to become like Apple.

So instead, it remains true that full IPR is not generally optimal, because full IPR:
(a) Slows down how successfully some ideas that have been invented are used by others, which you want to encourage. You know, once Apple comes up with a great device, you don’t want it to be the only company that does so, leaving me in my corner trying to work with a bad technology. You want me to use that good technology as well.
(b) This effect that I mentioned is still there, that if you can bring us closer, we both run faster and we’re both more innovative.
But it turns out in such models—and in a robust way—the optimal policy is to relax IPR protection when you and I are a few steps apart, but dangle the carrot that if you increase the gap between you and your rival to a sufficiently high level, then you’ll be given better patent protection.

Then in some sense, you’ll have your cake and eat it too. You can benefit from this effect that by letting me use your technology, you’re encouraging both of us to run faster, but at the same time not creating this very strong discouragement effect that people are going to put off doing R&D because they’re not going to be rewarded for that effort. On the contrary, they’ll be rewarded even more, because they’re going to escape not only their competitor, but they’re going to also escape the regime where their IPR is not very well protected. So that’s sort of the twisted logic of it all

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