Comparative Analysis of Innovation Failures and Institutions in Context

Many different legal and non-legal institutions govern and therefore shape knowledge production. It is tempting, given the various types of knowledge, knowledge producers, and systems with and within which knowledge and knowledge producers and users interact, to look for reductionist shortcuts — in general but especially in the context of comparative institutional analysis. The temptation should be resisted for it leads to either what Harold Demsetz called the Nirvana Fallacy or what Elinor Ostrom critiqued as myopic allegories. One easy reductionist step is to focus on a particular dilemma — a particular market failure, for example, ignoring or assuming away others — and then compare institutions in terms of effectiveness in resolving the dilemma. We might, for example, want to use comparative institutional analysis to examine the problem of pharmaceutical development. If we focus on overcoming the potential undersupply of drugs (because they are expensive to develop but cheap to copy), and if we identify the FDA approval process (and specifically clinical trials) as the most important cost driver, then we might compare as potential responses patents and other institutions like prizes, grants, and government provided infrastructure for clinical trials. We might then conclude that government funding of clinical trials is best because it lowers the cost of bringing drugs to market and without the deadweight loss associated with patents. That analysis might be useful, as far as it goes, but it would ignore other market failures, such as the demand-side failure that leads to underprovisioning of drugs to smaller or nonexistent markets. This is, of course, not to say that there is anything wrong with comparing institutions as solutions to the clinical trial cost problem. But it is to emphasize that we can only design institutions to address problems we recognize, and the risk of myopia is strong in comparative institutional analysis. Engaging in meaningful comparison seems to demand a reduction in the scope of problems to which the institutions might be addressed, lest the problem seem intractable. We suggest that comparative institutional analysis must be accompanied by comparative failure analysis, by which we mean rigorous and contextual comparative analysis of the ways different institutional responses fail. And we argue that several different types of failures are relevant to comparative analysis. Some failures originate at the system level — that is, market systems exhibit certain sets of failures, while political/government and community systems exhibit other sets. In terms of figuring out what society wants (i.e., from the demand side), the systems rely on different signals, information, processes, and so on. And in terms of satisfying societal demand, the systems rely on different actors, distribution methods, and relationships. Other types of failures are system independent — they are a function of the resources at issue or the nature of the problem to which the institution is addressed. Institutional de-sign can, of course, exacerbate or ameliorate these failures, but it is useful to understand their fundamental causes. So as a starting place, we think comparative analysis should account for characteristics that vary at the system level and shape both failures and institutions — characteristics like demand signaling processes, time horizons/discount rates, evaluative criteria (for projects, investments, or innovation), and the basic capabilities operative within different settings or systems. Failures and institutions obviously don’t correspond exactly, and we suspect that comparative analysis of these and other characteristics will provide guidance for continued comparative analysis. We strongly believe that solid comparative analysis will require both theoretical and empirical work, operating in tandem rather than in isolation from each other. Comparative analysis is necessarily contextual.