The classical justification for intellectual property rights is all too familiar. Ideas are public goods but can be costly to create. Without intellectual property rights, ideas will not be created sufficiently because creators have insufficient incentive to make investments and risk ventures for fear of misappropriation. Intellectual property rights resolve the cost imbalance between creation and misappropriation by granting creators limited-exclusive rights to their ideas.

In current policy discourse, opponents and proponents of intellectual property rights argue over the extent to which these rights solve the problem of public goods, compared to the costs they impose on society through litigation and the possibility for anti-commons/ patent thickets. The approach of balancing between the classical ex ante public goods-incentive theory for intellectual property and costs associated with these property rights is incomplete, however, especially in the area of patents.

An abundance of academic literature on intellectual property points to the ex post value of patents; how patents are important after invention. Patents, perhaps more than other forms of intellectual property, have received academic support for their ex post role in the commercialization, diffusion and transactional aspects of innovation.

Thus, the question arises: to what extent do ex post theories justify patents? Below, I outline arguments by Paul Heald, F. Scott Kieff, Edmund Kitch and Robert Merges that support the notion that ex post justifications may, to some extent, confer economic basis for the existence of patents.

Transaction cost theory for patents- Paul Heald, A Transaction Costs Theory of Patent Law, Ohio State Law Journal, Vol. 66 (2005): Heald argued that: “even if empirical evidence were to show that the costs of patenting and the value of stimulated innovation offset each other, the transaction costs theory suggests that the patent registration system should nonetheless be maintained as providing a net economic benefit.” At the center of Heald’s thesis is that patents lower transaction costs in previously unidentified ways, making them more valuable than other means of coordinating exchange. The patent system reduces the cost associated with partitioning rights over a span of players, ameliorating complexity in the number of contracts necessary for innovation. Further, inline with the research of Henry Chesbrough, Heald argued that patents facilitate the vertical decentralization of industry, enabling specialized and intermediate players to arise in the innovation landscape. Without patents, inflexible vertically integrated firms would be necessary simply to curb the risks and complexity in modern innovation.

The commercialization theory of patents- F. Scott Kieff, IP Transactions: On the Theory & Practice of Commercializing Innovation, Stanford Law and Econ Olin Working Paper No. 311 (2005). Kieff argued, from the standpoint of New Institutional Economics, that patents facilitate the commercialization of inventions, moving them from early stage technologies across the “valley of death” into downstream commercial deployment. Patents enable coordination among makers of complementary technologies, manufacturers and financers. Patents provide a centralized coordination point, encouraging and giving incentive for diverse actors to strike deals. Patents can connect firms, individuals and entities in intermediate markets involved in the commercialization process, and establish predictability through the enforcement of exclusivity, that can be important for investment backed ventures. Finally, patents are almost essential in industries where the cost to bring an invention to market far exceed costs to create; even if a product can be distributed close to marginal cost, firms need formal means of exclusivity as they refine, stabilize and coordinate complementary inputs.

The prospect theory for patents- Edmund Kitch, The Nature and Function of the Patent System, 20 J.L. & Econ. 265 (1977): Kitch, in Schumpeter’s economic legacy that privatization and exclusivity will encourage innovation more than perfectly competitive markets, proposed one of the first theories for IPRs premised on their ex post value. Kitch, in his prospect theory, argued that patents provide the most efficient means of developing, implementing and improving inventions once they are made. Kitch proffered that patents help internalize the costs and risks of commercializing inventions, conferring private incentive for parties to integrate inventions into commercial offerings, diffuse them to society and encourage future innovations. Kitch’s prospect theory is probably most relevant to groundbreaking and pioneering innovations, while the technology industries move predominantly along incremental and cumulative innovation, however his theory may still be valuable for early stage basic research in frontier technological areas.

New property rights economics- Robert Merges, A Transactional View of Property Rights, 20 Berkeley Tech. L.J. 1477 (2005): Merges looked at how IPRs enable transactions, and explained that patents provide a standardized legal device that work predictably even when contracts would be difficult to enforce. Patents allow parties involved in contracts to understand their rights and privileges, and those of others, before transactions; as well as giving means for pre-contractual liability. Patents are “contractual safeguard,” that enable flexible transactions, and support intermediate markets in the innovation landscape for specialized entities standing outside vertically integrated firms. This aspect can be highly valuable in cross-sector collaborations and licensing. Patents also help the diffusion of information, entailing protected information and positive externalities from R&D. In the New Economy, with the ease of transferring information and the sheer number of potential transactions, the value for transaction enabled by patents becomes essential.

The implication from the above academic literature on ex post justifications for patents is that arguments targeting only the incentive theory for patents, while useful for considering administrative and judicial changes to the patent system, are incomplete in their valuation of patents and their role in innovation. Academic research arguing that patents have not increased R&D spending, or unduly raise litigation costs without furthering innovation incentives, should be complemented with analysis of how patents promote "the Progress of Science and useful Arts" by enabling commercialization, coordination among diverse parties, diffusion of inventions and transactions essential in innovation.