This research is concerned with the incentives and rewards to innovation, and their impacts on economic development, growth and welfare. The investigator examines three related questions as follows: Is innovation going to the right areas? Are the incentives for innovation and diffusion of new ideas appropriate? What constitutes the innovation capital of the economy? By addressing these questions from a novel perspective, this research will advance our knowledge about some of the most important issues that relate to national prosperity and welfare. The investigator also identifies a new source of market failure that is very likely to attract future research in this area.
This research contains three projects. The first is concerned with where innovation resources go, how they are allocated across different R&D areas. The theory developed shows that the market allocates excessive innovation resources to high return areas relative to the social optima, as appeared to be the case in the dot.com boom. The source of the inefficiency is the lack of property rights on open problems that combined with R&D resources, give rise to innovations. It is a novel contribution of this project to recognize this source of inefficiency, and examine the specific channels and its potential magnitude. The second project is concerned with the incentives to innovate versus imitate and the interaction of the two forces in driving growth. Intellectual property rights affect the way in which innovators and imitators split the surplus created by knowledge transfer. This project further examines the impact on long run growth and welfare. The third project examines quantitatively the role of firms vis-a-vis inventors as sources of innovation and the properties of the match between the two.