Innovation: Market Failures and Public Policies
This is an invited chapter for the forthcoming Volume 4 of the Handbook of Industrial Organization. We summarize the state of the literature on the economics of innovation and highlight open policy questions. We first articulate the key market failures in markets for innovation, and then discuss how both scientific norms and market-oriented policies help overcome those market failures. We close by discussing recent work on the diffusion of inventions as well as on the links between innovation and inequality.
We are grateful to many colleagues for constructive comments and suggestions, including Pierre Azoulay, Yongmin Chen, Florian Ederer, Nancy Gallini, Patrick Gaule, Danny Goroff, Dan Gross, Ryan Hill, Erik Hovenkamp, Michi Igami, Adam Jaffe, Ben Jones, Alice Kuegler, Lisa Larrimore Ouellette, Enrico Moretti, Jacob Moscona, Kyle Myers, Kartik Shastry, Tim Simcoe, Carolyn Stein, and Scott Stern. We are also grateful to many of our students for helping to improve this chapter, including Ryan Broll, Dante Domenella, Maya Durvasula, Helen Kissel, Tamri Matiashvili, Gideon Moore, Helena Roy, Maya Roy, and Ralph Skinner. Financial support from NIA grant P01AG005842 (to the NBER), the Alfred P. Sloan Foundation, and the Smith Richardson Foundation are gratefully acknowledged. Finally, we are very grateful to Adam Jaffe and Mark Steinmeyer for their encouragement to write this chapter. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.