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December 23, 2008



An interesting idea, but probably not workable. The vast majority of intellectual property is worthless to society, and thus, no one, including the government, should pay a penny for it. But how is the government to determine what's worth paying for? And again, how is the government to determine how much to pay for that which is worth paying for? I envision every two-bit patent, text, recording, etc being offered-up for sale, and a bunch of inadequately trained and undermanned public servants trying to sort through all of the trash.

But more importantly, if a piece of intellectual property is worth something on the free market and the company that owns it needs cash immediately, why couldn't that company find a private entity to buy it? If no private entity is willing to buy it, then why should the government?

Nathan Smith

Why should the government buy it rather than a private entity? (a) Because in a recession, all private entities tend to be short of cash at the same time, but the government isn't. (b) Because if a private entity buys it, it will keep extracting monopoly profits. The point is to get it into the public domain.

Evaluating the net present value of a patent or copyright *is* a problem, to be sure. I'm not sure that it's harder to solve it than it is to make deal-by-deal bailouts in a non-distorting way. But, again, there's a general problem with intellectual property being inefficient, not only for the reason already mentioned-- the wedge between private and social valuations that causes inefficiently low consumption-- but also because intellectual propertyholders have an incentive to lobby *ex post* for broadening and extension of copyrights/patents, and often do so successfully. To evaluate intellectual property you'd want to have a formula based on how much it was used. For some patents/copyrights there would be a fairly steady stream of income and the net present value of that income stream could be calculated. Useless copyrights and patents would not be generating current income streams and so would not qualify for buyouts, and rarely used copyrights and patents would qualify only for cheap buyouts. (My dad and his publishers might get a few thousand for making his books public domain.) One result might be that it would be the fading technologies that would be more likely to agree to buyouts, but that's okay. If you ended up transfering "rents" (rewards in excess of costs) to intellectual propertyholders, you would encourage people to seek such rents *ex ante* by doing more inventing. Especially since intellectual property would become a *counter-cyclical* asset: own patents and copyrights, and you'll get to profit from buyouts at exactly the time that most other investments are crashing!


I suppose you could make it a requirement that if the government bails you out, you relinquish the rights to some or all of your intellectual property. You would still have the problem of determining who deserves a bailout, though. Regardless, if a bailout is going to happen, there should be many strings attached, the relinquishment of intellectual property being possibly one of them.

Nathan Smith

Yes, that would be the idea of an intellectual property buyout: you get a bunch of money from the government, equal to the net present value of the realized royalties that you have been earning on your patents and copyrights, and in return, you lose the rights to those patents and copyrights, which then become public domain. However, I wouldn't restrict it to firms that are in trouble. Giving money to *people* who are in trouble creates moral hazard but might be a good idea on "compassion" grounds. Giving money to *firms* that are in trouble creates moral hazard, but might be a good idea on entanglement grounds, namely that failures of one firm affect all the firms with which it does business, disrupting supply chains etc. But this seems to me a price we should just pay. If supply chains are not sufficiently robust a lot of firms should get burned and forced to come up with business models that are less vulnerable to disruptions. If we're in a liquidity crisis and just need to move some money for stimulus purposes, it would be nice to do so in a way that doesn't reward failure. Intellectual property buyouts might help GM in the short run: they could get a bundle of cash while letting their designs turn public domain, and use the money to pay off creditors. In the process they would eliminate a lot of the reason for the firm to continue existing, so the effect might be to liquidate the firm while bailing out some of the creditors. But you would also create an opening for new firms to build "generic" cars based on GM designs.

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