Switching from Patents to an Intertemporal Bounty in a Non-Scale Growth Model: Transitional Dynamics and Welfare Evaluation

The prize system for innovation has been criticized as impractical due to the lack of a workable formula or algorithm to determine the size of prizes. In this paper, a decentralized market mechanism via the intertemporal bounty (IB) system can function to duplicate Pareto optimality. Under this system, any bountiable innovation is placed in the public domain, and the prize of innovation is dynamically amortized in an infinitely time domain as periodic bounties paid to holders of bounty claims. Periodic bounties are calculated using a government-determined bounty rate times observed market sales. Two formulas are derived to calculate “long-run Pareto optimal bounty rate” and “long-run suboptimal bounty rate.” The former can correct monopoly distortions and externalities, while the latter can only address monopoly distortions. They are empirically computable and can serve as an upper bound and the lower bound of the bounty rate. This paper provides a dynamic general-equilibrium analysis of replacing finitely-lived patents with the IB system using either of these two bounty rates. Based on a non-scale growth model calibrated to the US economy, transition paths are worked out to compute welfare gains.