How Do Inventors Respond to Financial Incentives? - Evidence from the 2001 Court Decision on Employee Inventions in Japan

Using a novel panel dataset of corporate inventors matched with their employers in Japan, we examine the effects of output-based financial incentives on corporate inventor's performance. We exploit the 2001 court decision that discontinuously forced many firms to adopt or strengthen the financial incentives based on the commercial success of an invention. Our estimations that account for inventor heterogeneity reveal that the compulsion of stronger financial incentive did not increase citation-weighted patent counts at the inventor level and significantly decreased the number of science-based patents. These results show that financial incentives based on the commercialization performance of an invention can be counter-productive means to enhance inventors' performance, and that the compulsion of such remuneration to employee-inventors in the article 35 of Japanese patent law could distort the efficiency of corporate R&D