Encouraging Additional Real Investment and R&D : A Partial and Preliminary Third-Best-Allocative-Efficiency Analysis of Related Antitrust, Tax, Tort-Law, and 'Innovation-Law' Policies

Politicians and most economists seem to assume that from the perspective of allocative (economic) efficiency we currently devote too few resources to real investment in general and R&D in particular. They therefore support antitrust, tax, tort-law, and "innovation-law" policies that will tend to increase the amount of resources devoted to all types of real investment and R&D. This Article argues that this assumption and those related policy conclusions are far too crude. The Article begins by executing a partial and preliminary third best-allocative-efficiency analysis that concludes that although the extant Pareto imperfections almost certainly cause the private profitability of production-process research (designed to make discoveries whose use will reduce the private or allocative cost of producing relevant quantities of extant products) to be lower than the allocative efficiency of such research, those imperfections seem very likely to cause the private profitability of product research and non-innovative investments in product quality or variety to be higher than their allocative efficiency. The primary reason for these latter conclusions is that imperfections in seller competition seem likely to deflate the private cost that a product-R&D investment or non-innovative product-investment (cause their private cost to be lower than their allocative cost) by more than they deflate the private benefits of product research and non innovative product investment yield the investor. The Article concludes by outlining the implications of these results for the desirability of various extant and proposed antitrust, tax, tort-law, and copyright-patent-and-trade-secret policies. The general thrust of its argument is that, to be allocatively efficient, policies that seek to encourage additional R&D expenditures or investments in general must be more selective -- must be designed to insure that they will subsidize only those expenditures whose profitability would otherwise be deflated by the Pareto imperfections present in our economy