A quick housekeeping note: if you are at Carnegie Mellon, I will be presenting a new paper (joint with Jorge Lemus, also here at Northwestern) in Posner Hall, room 388, from 12 to 1 this Friday. Come by and say hi!
The paper I’m presenting is actually quite cool, and we have pretty high hopes for it. Take the standard models of patent races or sequential innovation. The problem in those models is, do firms exert the socially optimal amount of effort on R&D? But this is not the only problem, as the title of the classic 1962 “Rate and Direction of Inventive Activity” NBER volume makes clear. The amount of effort may be fine, but firms may be working on the wrong projects. The intuition here we know from statements like “Firms do not do enough basic research.” What we’ve done is write out a totally general model of research direction which, for applied folks, is usable as long as you are familiar with standard sequential innovation models. We shut down all the already-known sources of inefficiency, and find that the interaction of direction choice and sequential innovation creates three qualitatively novel sources of inefficiency. Fixing these inefficiencies can be difficult; for example, broad patents for early inventors can actually make inefficiency worse.
Both Jorge and I would love your comments, so come on by!
A Fine Theorem 