Eyes on the Prize
First of all, a bit of background. If you are an economist who supports the selection, i.e. that the winning economist's work supports your own work, then you must praise the Nobel committee's choice and the prestige of the prize. If you are not, then you must highlight that the economics prize is not a true Nobel prize, as it is comes from the Swedish National Bank, and therefore is not particularly impressive. Either way, one must be careful not to be too enthusiastic about a fellow economist's success, lest it be taken for indication of an emotional imbalance.
Second of all, some tips if you, dear reader, are interested in winning said prize. First of all, start early and live long so that your genius has time to be recognised. Second of all, be male. Only one woman, Elinor Ostrom, has received the prize. Third, make sure you are somehow Western, and ideally American. Fourth, become at expert at posing for photos in front of books. Finally, surprisingly, remember you don't actually have to be an economist to win; John Nash, who had the gall to be a mathematician, won in 1994. Things really are going to pot.
Hart and Holmström have won the prize because
Hart built further on this theory by examining the incompleteness of contracts. No contract can possibly foresee every outcome and consequence of incentives. He argued that property rights help mitigate this, as they place the burden of decision making on those with the property - and hence those with a stake in the unforeseen outcomes. Hart's recent work on prisons illustrates this; summarised by The Economist: "In publicly owned prisons, managers might underinvest in quality-improving measures, but private owners face too strong an incentive to cut costs, leading to conditions for prisoners that are worse than those in public prisons." These incentives apply to most government services. A privatised patent-granting body would have different incentives than a public body (think of those renewal fee$!)
Contracts and IP
Readers of Katonomics will be familiar with economists' focus on the incentives-to-innovate theory of IP. This is often known as the Social Contract (covered previously here), in which IP is a contract between innovators and society; the monopoly protection of IP provides a long-term incentive to innovate. Society cannot foresee (information asymmetry) the value of each potential innovation, so all innovators are granted the same level of protection. Assigning the property right to the innovator incentivises innovation as the innovator has a stake in the outcome and the IP system as a whole.
|Trophies, by R. Oxley, CC|
Finally, licensing contracts enjoy a never-ending analysis of incentives and clauses. The primary job of lawyers negotiating and drafting such contracts is to align the incentives in the contract with the needs of the client. While researching the biotech sector in 2007, I came across an interesting case. My interviewee had exclusively licensed a product on a royalty basis. The licensee instead marketed a competing product, leaving the licensor without royalties. The contract had been used to eliminate competition from the market, and failed to align the parties' incentives. Another anecdote is the use by wealthy Multi-national Companies (MNC) of reversion clauses when partnering with companies in developing countries. The MNC engages in joint research and market expansion, then deliberately causes the project to fail in order to trigger the reversion clause. Both background and foreground IP, as per the contract, revert to the MNC. It's a cheap way to expand internationally.
I invite readers to tell their stories of the odd quirks of licensing contracts in the comments. In the meantime, I'm off to work with Merpel on contract incentives of catnip producers. Fingers crossed for a Nobel!