On the Informal and Formal Institutions Protecting Creative Effort (intellectual Property)

Abstract: Creation and innovation are crucial to economic growth. They can be stimulated variously by informal and formally legal means. The legal system must support the institutions through which innovators legitimately seek reward for their efforts, whilst avoiding these institutions turning into rent-seeking structures impeding follow-on innovation. Some institutions, such as the first mover advantage or 'lead time,' or black listing and community sanctions against free riders, are informal and not directly legal. Secrets and intellectual property rights (IP) are legal institutions supported in order to stimulate innovation. IP looks like a straightforward application of the ‘property rights’ paradigm. To manage scarcity and focus management skills and creative talent, create property rights whose incentive effects will do the job. But the story is more complicated since, unlike physical goods, information, the object of IP, is not inherently scarce; indeed, as information and communication technologies expand, the information is becoming ever cheaper to create and distribute, and is, in many circumstances, abundant, so that selection is of the essence ('on the internet, point of view is everything'). This would argue for free accessibility (public goods argument). But attracting creative talent often seems to require legally supported reward, which is what IP intends to provide. Yet if IP rights on information extend too far, their monopolising effect may hamper follow-on innovation. As internet use expands, this appears to be a major challenge of our time. The paper investigates the underlying structure of informal protections as well as formal IP rights and surveys what we know empirically about industries that flourish without formal IP (including the fashion industry) as well as about the incentive effects of formal IP rights. stimulating innovation.