Abstract and Keywords
Efficient innovation policy requires decoupling of the innovator's private rewards from consumer prices, and instead tying them to the marginal social value of the invention. This is not easy to achieve, but movement toward this goal can be effected through a mix of policy instruments. This article develops this thesis by drawing on the existing theoretical and empirical literature on innovation. It begins with the canonical positive model of innovative activity, along with its various extensions, weaknesses, and criticisms. It then turns to the empirical literature testing and quantifying the implications of this theory and its variants. Next, it moves to the normative implications of economic theory and describes how the empirical literature sheds light on the nature and degree of inefficiency in the discovery and dissemination of innovative goods. Finally, it characterizes various policy approaches to ameliorating these inefficiencies at their root.
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