Incentives and Invention in Universities

Economic incentives...affect the number and the commercial value of inventions generated in universities.

American universities are an important source of technical change, accounting for roughly half of all basic research and almost 5 percent of all domestic patent grants in the United States. In the past two decades, technology licensing by American universities has grown dramatically. The number of U.S. patent awards to university inventors rose from 500 in 1982 to more than 3,100 in 1998. The number of licenses executed on university inventions more than tripled in the past ten years from 1,278 to 4,362 and gross licensing revenues increased nearly seven-fold, from $186 million to nearly $1.3 billion.

In Incentives and Invention in Universities (NBER Working Paper No. 9727), authors Saul Lach and Mark Schankerman investigate what drives academic research and technology licensing activities. They ask whether it is purely an intellectual pursuit or if economic incentives play a role. They conclude that economic incentives do, in fact, affect the number and the commercial value of inventions generated in universities.

Using panel data for 102 U.S. universities during the period 1991-9, Lach and Schankerman find that universities that grant higher royalty shares to academic scientists generate more inventions and higher levels of license income. This is true regardless of university size or quality, or the amount of research funding and technology licensing inputs. These "incentive effects" are much larger at private universities than at public ones. In private universities, raising the inventor's royalty share actually increases the license income retained by the university. The incentive effects appear to work both through the level of effort of scientists and through the sorting of academic scientists across universities.

In addition, the authors find that private institutions have more effective and commercially oriented technology transfer activity than public universities. These findings are important because they imply that the design of intellectual property rights in academic institutions can have real effects and that private ownership appears to be important for effective technology transfer in the university sector. Why private ownership is important in this context remains an open, and important, question for future research.

In all U.S. research universities the cash flow rights from licensing inventions are shared between the inventor and various parts of the university according to specified royalty sharing schedules. The authors use the variation in royalty sharing arrangements to estimate the effect of this sharing on inventive output. Their data come from three sources. The main source is the Annual Licensing Surveys for the years 1991-9, published by the Association of University Technology Managers. To control for differences across universities in faculty size and scholarly quality, the authors use data from the 1993 National Survey of Graduate Faculty, conducted by the National Research Council. The third source of data is information on the distribution of licensing income between faculty scientists and the university; this information was downloaded from the websites of individual technology licensing offices. The mean value of the inventions disclosed was $43,000. But licensing outcomes are very skewed -- only a few universities produce large numbers of inventions and only a few inventions are very valuable.

-- Les Picker