NBER WORKING PAPER SERIES INTELLECTUAL PROPERTY RIGHTS AND INNOVATION: EVIDENCE FROM THE HUMAN GENOME

This paper provides empirical evidence on how intellectual property (IP) on a given technology affects subsequent innovation. To shed light on this question, I analyze the sequencing of the human genome by the public Human Genome Project and the private firm Celera, and estimate the impact of Celera's gene-level IP on subsequent scientific research and product development outcomes. Celera's IP applied to genes sequenced first by Celera, and was removed when the public effort re-sequenced those genes. I test whether genes that ever had Celera's IP differ in subsequent innovation, as of 2009, from genes sequenced by the public effort over the same time period, a comparison group that appears balanced on ex ante gene-level observables. A complementary panel analysis traces the effects of removal of Celera's IP on within-gene flow measures of subsequent innovation. Both analyses suggest Celera's IP led to reductions in subsequent scientific research and product development outcomes on the order of 30 percent. Celera's short-term IP thus appears to have had persistent negative effects on subsequent innovation relative to a counterfactual of Celera genes having always been in the public domain. Heidi L. Williams National Bureau of Economic Research 1050 Massachusetts Avenue Cambridge, MA 02138 and NBER heidiw@mit.edu It has long been recognized that competitive markets may not provide adequate incentives for innovation (Nelson, 1959; Arrow, 1962). Given the presumed role of innovation in promoting economic growth, academics and policy makers have thus focused attention on the design of institutions to promote innovation. Intellectual property (IP), such as patents and copyrights, is one frequently-used policy lever. IP is designed to create incentives for research and development (R&D) investments by granting inventors exclusive rights to their innovations for a fixed period of time. An important but relatively under-studied question is how IP on a given technology affects subsequent innovation in markets where technological progress is cumulative, in the sense that product development results from several steps of invention and research. In this paper, I provide empirical evidence on this question by analyzing the sequencing of the human genome by the public Human Genome Project and the private firm Celera, and by estimating the impact of Celera’s gene-level IP on subsequent scientific research and product development outcomes. The sign of any effect of IP on subsequent innovation is theoretically ambiguous. I outline a simple conceptual framework that focuses attention on two counteracting effects. Consider two firms: Firm A holds IP on discovery A, and Firm B has an idea for a downstream product B. On one hand, IP on discovery A could discourage R&D on product B if an appropriate licensing agreement cannot be reached. In a classic Coasian framework, Firms A and B could always negotiate appropriate licensing agreements (Green and Scotchmer, 1995). However, transaction costs may arise if, for example, Firm B’s research costs are private information. Such transaction costs could cause licensing agreements to break down, potentially discouraging R&D on product B (e.g. Bessen (2004)). On the other hand, IP on discovery A could encourage R&D on product B if there is imperfect IP protection in downstream markets, in which case IP on discovery A could increase Firm B’s ability to capture rents in the market for product B (e.g. Kitch (1977)). Empirical study of this question has traditionally been hampered by concerns that the presence of IP may often be correlated with other factors, such as the expected commercial potential of a given discovery. The contribution of this paper is to identify an empirical context in which there is variation in IP across a relatively large group of ex ante similar technologies, and to trace out the impacts of IP on subsequent scientific research investments and product development outcomes. Two efforts, the public Human Genome Project and the private firm Celera, aimed to sequence the DNA of the human genome. The two efforts took different approaches to DNA sequencing, inducing differences in which effort first sequenced a given gene. Once sequenced by the public effort, genes were placed in the public domain, with the stated aim to “. encourage research and development. ” If a gene was sequenced first by Celera, the gene was held with Celera’s IP, and a variety of institutions paid substantial fees to access Celera’s sequencing data even though Celera genes would move into the public domain once re-sequenced by the public effort. Celera’s contract law-based (rather than patent-based) IP applied for a maximum of two years, with all Celera genes moving into the public domain by the end of 2003. From this empirical context, I construct two research designs to test for the effects of Celera’s IP on subsequent scientific research and product development outcomes. The first research