Market proxies for innovation

So how can you make money out of innovation without a patent? Take positions in firms or assets that will appreciate (or I guess depreciate) if the innovation is successful. It is an old idea but a new paper by Debrah Meloso, Jernej Copic and Peter Bossaerts in Science tests it out in the laboratory against a patent-like system. I’m not sure what to make of it yet but it is interesting.

[DDET Read abstract]

Because they provide exclusive property rights, patents are generally considered to be an effective way to promote intellectual discovery. Here, we propose a different compensation scheme, in which everyone holds shares in the components of potential discoveries and can trade those shares in an anonymous market. In it, incentives to invent are indirect, through changes in share prices. In a series of experiments, we used the knapsack problem (in which participants have to determine the most valuable subset of objects that can fit in a knapsack of fixed volume) as a typical representation of intellectual discovery problems. We found that our "markets system" performed better than the patent system.