Toward an Economic Theory of Property in Information

Henry E. Smith (Harvard Law School)

Abstract: Part of the controversy over intellectual property stems from inadequacies in the economic theory of property rights. Property is assumed in both law and economics and in New Institutional Economics to be any expectation of being able to act upon or derive value from a resource. Such Legal Realist-inspired, thin notions of entitlement cannot explain why society would grant property rights in information, as opposed to government rewards and the like. By contrast, a theory of property that stresses its architecture of in rem rights, starting with modular exclusion strategies for defining things and supplemented with interface conditions of governance rules, helps explain how property rights promote the commercialization of inventions and coordination over rival inputs to nonrival information. Modular property is contrasted with full contracting and restitution-with-tracing as methods for promoting the appropriation of returns from such rival inputs. The basic architecture of modular exclusion and interfaces of governance rules manifests itself in dynamic changes in intellectual property, in the asset-partitioning function of intellectual property, and in the issue of the compatibility of intellectual property rights. It is the basic architectural features that result from the information costs involved in the appropriation/access tradeoff, rather than the provision of rewards to innovation, that bring property and intellectual property closer together.

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