Timing of incentives in crowdfunding
Patents, prizes, government grants, and R&D tax incentives are ways to reward and incentivize innovation. One of the ways in which these schemes differ is the timing of the reward. Patent holders are rewarded after the product is developed and patented over the course of 20 years (length of the patent) but only if the product is commercialized (since rents are earned from the market). Prize-winners are awarded according to the competition rules although it is almost always after some sort of result. Government funding and tax incentives is granted throughout or before the development period and often before any final results are produced. R&D tax incentives have a slight delay from the process of getting through the tax system to realize those benefits.
Crowdfunding, most popularly embodied by Kickstarter, leverages small contributions from the masses to finance various projects and presents an interesting timing issue. Crowdfunding and patents are similar in that rents are collected from the private market but there is a slight shift in timing. Projects may vary in what stage they are in, but on Kickstarter, most if not all creators seem to have at least some prototype if not the actual product developed before their campaign launch. Kickstarter sets out additional requirements and guidelines for hardware and design products, and while there is no requirement what stage the project must be in, the language seems to assume that there is at least a working prototype. Since the ideation step is often completed by the time a crowdfunding campaign happens, crowdfunding incentivizes dissemination and commercialization, and there is questions on whether this is a good thing.
As far as incentives go, crowdfunding more directly encourages the dissemination of technology rather than the creation of it. This begs the question of whether crowdfunding and patents as incentive schemes overlap to a point of inefficiency and whether crowdfunding may undermine the justifications and existence of a patent system under certain circumstances.
This dichotomy of “ex ante” versus “ex post” rewarding calls into question many of the philosophical underpinnings of intellectual property regimes. The “ex-post justifications” for IP claims that without IP protection, innovators will not, upon ideation and initial development of the IP, continue to further invest in the improvement or commercialization of the product. It is the same sort of argument found in property law for the privatization of land in hopes of internalizing both the costs and benefits of the land thus resulting in efficient use. The traditional/ideation justification of IP is that innovators have expended significant costs to develop the innovation thus putting them at a disadvantage in a competitive market against others who have made no such contribution to innovation. But at the production and distribution stage, the intellectual property already exists and the additional dissemination costs are dictated by internal efficiency, which is how a competitive markets function. As long as people are willing to pay a price equal to marginal cost, some firm will distribute it, and we theoretically won’t see the kind of market failure that would occur with ideation.
Perhaps, crowdfunding and patents together provide excessive incentives to innovate and commercialize. Or perhaps this incentive to disseminate creates ex ante incentives to innovate. It is difficult to parse out the difference.
Christine Shim is a J.D. candidate, ’15, at the NYU School of Law.