In the previous chapter, we focused on the positive aspects of R&D by examining the interplay between market structure and innovation. In consequence, we were not too specific about the exact regime of intellectual property (IP) protection. In this chapter, we want to adopt a more normative point of view and study how IP protection should optimally be organized. This chapter also provides the reader with a broad (and essentially non-technical) description of the realm of IP.

In Section 19.1, we describe the appropriability problem of innovation and we consider several ways to close the wedge that this problem drives between social and private rates of return from innovation. We start with the main policy instrument that has been designed to promote innovation, namely the institution of intellectual property and its legal protection (essentially through IP rights such as patents and copyrights). We explain that the main rationale of IP rights is to provide incentives to produce information and knowledge by conferring a monopoly right to the producer. We then compare this institution to other public and private responses.

In our discussion of IP rights in Section 19.1, we argue that the negative impacts that monopolies have on welfare call for limitations on the legal protection conferred by IP rights. What type of limitations? This is the question we address in Section 19.2. As innovations are mainly protected by patents, we focus on the optimal patent design.