Incentive Design for Inventors: Theory and empirical evidence

Given the expected fundamental reform of Article 35 of the Japanese patent law, which has been governing the transfer of ownership of employee inventions to firms, the freedom of designing the incentive system for inventors would increase significantly. In order to provide basic guiding principles for such design as well as for complementary policy measures, this paper presents new empirical evidence derived from the analyses using inventor surveys as well as insights from the survey of the theoretical literature on the optimal incentive scheme for innovation.

Major findings are the following: while a variety of motivations drive inventions, intrinsic motivations such as satisfaction from solving challenging technical problems and that from contribution to scientific and technical progress are especially important, and inventions that are importantly driven by such motivations tend to have high inventive-step as well as high economic value. A wide menu of economic incentives for an inventor is available such as payment at invention disclosure and patent application, payment based on the commercialization of the patent, research freedom, promotion, salary increase, as well as their combinations. Evidence suggests that high quality inventions in Japan are significantly associated with a promotion and/or a salary increase for the inventor. The theory of incentive designs also suggests that a multitude of factors must be taken into account in the incentive design, including the risk bearing capability of an inventor, the monitoring possibility of a firm, research and development (R&D) characteristics, and the commitment power of a firm to long-term incentive. We further argue that the characteristics of the workforce sorted into the firm should also be considered in designing the optimal incentive scheme, as the data show that the effect of monetary incentives declines with the strength of the intrinsic motivations.

Given the expected heterogeneity in the optimal incentive systems, it is imperative that firms compete in designing better incentive system for innovations. An important prerequisite for this is the freedom to design a clear ex-ante rule on the transfer of employee inventions' ownership. The government has to ensure that the contract and the agreement on the incentive system between the management and the employees to be respected as well as to support inventions with high spillover effects which otherwise might not be undertaken due to relatively small private benefits for the inventing firm.

The English version of this paper is 15-E-071.