Category: Law
Defending Independent Invention
In the minds of the public someone who infringes a patent is like a plagiarist or a thief–the infringer has copied someone else’s work or, even worse, stolen their intellectual property. In reality, patent infringement has very little to do with copying or theft. Here’s how I described what is probably closer to the paradigmatic case of patent infringement in Launching the Innovation Renaissance:
Two inventors, Kelly and Pat, work independently, neither aware of the other’s existence. Kelly patents first. Under the present law, if Pat wants to sell or even use his own invention, he must pay Kelly a license fee (!) even though Pat’s idea came from his own head and no other.
If independent invention were uncommon this type of case wouldn’t be important but independent invention is very common. Classic cases include Newton and Leibniz with the calculus, Alexander Graham Bell, Elisha Gray and Johann Philipp Reis with the telephone, Ohain, Campini, and Whittle with the jet engine and so on. And if independent invention is common with great discoveries and inventions then it is surely much more common with ordinary innovations. As a result, it’s not surprising that most patent cases don’t even allege copying.
Independent invention should be a defense in a patent infringement lawsuit. An independent invention defense would allow Kelly to exclude imitators but would prevent Kelly from excluding an independent inventor such as Pat.
Inventors should not have to pay to use their own ideas! An independent invention defense is not only just, it also has good economic properties. An independent invention would create more competition. On the one hand, this does reduce the “pot of gold” incentive to create new ideas, the winner of a patent race might have to sell as a duopolist rather than a monopolist. In this case, however, there are several reasons why we wouldn’t expect the number of ideas to fall and innovation could even rise.
First, firms today are often surprised to find that they are being sued for patent infringement. An independent-inventor defense would give inventors greater security in their ideas, thus increasing the incentive to invest. In this age of cumulative innovation often what innovators want most is the security that they can build on what they have produced already. Lawsuits and associated transaction costs would also be reduced.
Second, the type of inventions that are most likely to be independently invented are those with high value relative to their cost. Thus, an independent-invention defense would automatically tend to offer smaller rewards to low-cost innovations and larger awards to more costly innovations, this is exactly the optimal rule discussed in my paper Patent Theory versus Patent Law (pdf) but unlike the system described in that paper it does not require anyone to examine an inventor’s costs.
The patent system is supposed to be about increasing the progress of science and the useful arts but to often it ends up cudgeling the very people it is meant to protect, the independent inventors.
*The Failure of Judges and the Rise of Regulators*
That is the new book by Andrei Shleifer, and it collects his major and very important writings on regulation and law and economics, many with notable co-authors. Some of these papers have been discussed previously on MarginalRevolution. If you wish to own those papers, this is your book.
A wee bit of financial history
If March 4, 1933, and February 11, 2009, marked the nadirs of public confidence in Wall Street, then the years 1928 and 1999 marked the zeniths, when Goldman Sachs sold shares to the public for the only two times in its history. In December 1928, the partners of Goldman Sachs sold shares in a subsidiary called Goldman Sachs Trading Corporation–for its day, a complex, highly leveraged instrument with many layers that made transparency all but impossible. By the time of Roosevelt’s inauguration in 1933, the shares were nearly worthless. For the next 70 years, burned by that experience and FDR’s excoriation in 1933, the firm’s partners retreated to their roots as a private partnership, using their own personal capital with only modest leverage to advance their role as a financial intermediary.
By 1999, Goldman’s reputation had recovered to its previous zenith–to the point that a public offering again was possible. Its partners had debated the merits of such a change for years, and, even when the decision was made to go forward, the decision was reached only after vigorous debate and much disagreement. In favor of going public were those partners who saw a need for a larger capital base to allow the firm to compete in the increasingly globalized economy with the larger players both in the U.S. and overseas. Furthermore, once a public market was established for its shares, Goldman would have a currency other than cash with which to acquire other businesses and grow into financial services it could not afford to enter as a private partnership. On the other side of the argument were those partners who were worried about the impact that transition to a public firm would have on the firm’s culture. Heretofore, the firm had been known for its low ego and gang-tackling ethos, with aggressive personalities kept in check by the partnership potential that was strongly linked to both productivity and cultural fit.
What neither the firm’s partners nor outside observers were able to foresee was the resulting change in the firm’s risk tolerance…
For the pointer I thank John Phillips.
Department of Yikes
…his German counterpart [finance minister] suggested postponing Greek elections and installing [sic] a new government without political parties.
I do understand the financial motive here, but this is not a good idea! It is even less of a good idea to say so in public. Is the goal simply to irritate the Greeks so much that they leave the Eurozone on their own? Twitter rumors are suggesting that Finland and the Netherlands are raising similar ideas, namely postponing elections and, it seems, simply ruling the country through its budget? I am not sure how this is supposed to work, or to be received in Greece, or why it should be a good precedent for the European Union. The FT story is here.
Dividends and taxation
President Obama wants to tax dividends at ordinary income rates. These results, from Marcus and Martin Jacob, should not come as a huge surprise:
We compile a comprehensive international dividend and capital gains tax data set to study tax explanations of corporate payouts for a panel of 6,416 firms from 25 countries for 1990-2008. We find robust evidence that the tax penalty on dividends versus capital gains is statistically significant and negatively related to firms’ propensity to pay dividends, initiate such payments, and the amount of dividends paid. Our analysis further reveals that an increase in the dividend tax penalty raises firms’ likelihood to repurchase shares, initiate such repurchases, and the amount of shares repurchased. This is strong confirming evidence that when listed industrial firms globally design their payout policies, they take into careful consideration the relative tax implications of their payout choices.
Here are some Finnish results:
Using register-based panel data covering all Finnish firms in 1999-2004, we examine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The estimation results reveal that those firms that anticipated a dividend tax hike increased their dividend payouts by 10-50 per cent. This increase was not accompanied by a reduction in investment activities, but rather was associated with increased indebtedness in non-listed firms. The results also suggest that the timing of dividend distributions probably offsets much of the potential for increased dividend tax revenue following the reform.
Here are more results from Finland. In the UK dividend tax increase of 1997 it seems pension funds were the marginal investor and they bore much of the burden from that particular reform.
Wealth externalities and limited liability in banking
Arnold Kling writes:
Suppose that you sell your shares in Shakee Bank to me today, and tomorrow Shakee has to be taken over by the FDIC. Am I liable for losses, which probably were caused by decisions made before I bought my shares? Suppose that Shakee has accumulated $8 billion in losses, and all its shareholders of record obtained their shares for a collective $0.10. What happens then?
I don’t envision the FDIC being eliminated, but say the government is in a position to be picking up some potential bondholder losses. Under one version of the reform, bank shareholders already have posted extra collateral, by requirement of the law. That is somewhat like higher bank capital requirements, with the twist that there is now a new legal class of bank capital.
That is an improvement over the status quo, but it’s not the most innovative form of the proposal. One alternative version is for the government to outsource the enforcement to the bank itself. For instance the regulator can say: “as insolvency approaches, the bank is liable for 1.5 to 1, it can come up with the money any way it wants. If it can’t come up with the money, we will take the major shareholders of record, say a year before the event (or consider a more complicated weighted average of this variable) and send them an income tax assessment for 2-1.”
The bank might preemptively organize like a partnership, or it might apply its own collateral and capital requirements to the shareholders, or it might find some other way of meeting the obligation. Banks would compete to find the better solutions.
In response, many people fear banks trying to set up with only hobo shareholders. That would avoid the 2-1 or 1.5 to 1 or whatever, because hobos don’t have extra assets to attach. I just don’t think those banks will become major money center institutions because the quality of shareholders really does matter at some level. For instance such banks could not have wealthy, highly motivated, equity-holding CEOs. Most likely hobo banks would stay small and thus skirt the too big to fail problem or maybe they would not exist in the first place.
One problem with traditional capital requirements is that the government ends up making comovement-inducing ex ante decisions about which assets count toward satisfying the capital requirement. Remember AAA CDOs in America and AAA government securities in Europe? Under non-limited liability, only cash is accepted but it only has to be delivered ex post in the case of failure. The regulations themselves need not create the same kinds of uniformity, misjudgments, and excess systemic risks up front.
One tricky question is how to apply non-limited liability to foreign banks operating in the United States. This is a problem with all regulatory schemes based on less than perfect international coordination. The first cut approach is to insist on non-limited liability for U.S. operations, though of course evasion and reclassification of operations may occur.
Mark Thoma adds lengthy comments. Here is a very relevant paper by Claire Hill and Richard Painter, and a blog post by them. Here is Suzanne McGee. Here are some debates on non-limited liability in economic history, including work by Lawrence H. White.
Gordon Tullock is 90 years old today
Here are previous MR entries concerning Gordon.
The evolution of parking in Manhattan
Matt Yglesias and Ryan Avent can smile:
The Department of City Planning recently completed its most ambitious study of parking in Manhattan in three decades. The report found that the way cars are used in the city has changed since the early 1980s, when the Clean Air Act’s stricter codes limited the number of new parking lots. Developers were no longer required to provide parking in new developments, and special permission was needed to build large garages.
When the rules went into effect, 85 percent of off-street parking was taken by commuters. Now, depending on the neighborhood, up to 70 percent of those spaces are used by residents.
Over the last three decades, the number of off-street parking spots in Manhattan has fallen by one-fifth — to 102,000 from 127,000, according to the city study.
In the last six years alone, according to data compiled by Property Shark, 92 parking lots or garages have been sold and redeveloped. From the Avenue of the Americas, where a garage fell for a hotel, the Eventi, with rental apartments on top; to Varick Street, site of a condo-to-be, the humble lot has seen better days.
The longer story is here, and of course Manhattan has done fine over this same period of time. Ryan’s eBook is here, I believe Matt’s is due out soon, I look forward to reading it. Here is my earlier column on minimum parking requirements. Here is Matt on Donald Shoup.
The cultures that is Italy
Responsible for one of the most stupid shipping accidents of all time, not to mention the death of thirty or so passengers, Schettino was nevertheless greeted in his home town of Meta di Sorrento (on the south side of the bay of Naples) by a crowd waving banners in his favor and complaining, priest included, that the man’s bad press was the result of a general prejudice against their community. “Every Italian,” Giacomo Leopardi dryly remarked in 1826 “is more or less equally honored and dishonored.”
Here is more, interesting throughout.
The West Rt. 50-Gallows feed
There are three lanes, with the left two lanes narrowing into one. A slight bit further ahead, the traffic from Gallows Road merges into the right lane, map here.
Many people from the far left lane merge “unethically,” driving ahead as far as they can, and then asking to be let in at the near-front of the queue. The traffic from Gallows Road, coming on the right, merges ethically, as it is a simple feed of two lanes nto one. They have no choice as to when the merge is, although de facto the construction of the intersection puts many of them ahead of the Rt.50 drivers.
The left lane merge is slightly quicker than the right lane merge, in part because not everyone is an unethical merger. Yet it is more irksome to drive in the left lane, because you feel, correctly, that people are taking advantage of you (unless you are an unethical merger yourself, which I am not).
In recent times, I have switched my choice to the right lane.
How is immigration different in 2012?
Loyal MR reader V has a request:
1. Engage with the arguments by Sailer and his ilk that Mexican immigration is different than the waves of the 1920′s, 1880′s, etc.
Specifically, they cite the example of New Mexico, current Latin America, evolving California, etc. where class-based hierarchies that closely mirror IQ differences have proven remarkably stable to all sorts of interventions over the time span of centuries (whether peaceful in the case of NM or violent in the case of the Mexican revolution).
Also, they point out that communication differences as well as the changed nature of the economy now (i.e., many fewer blue collar manufacturing jobs that transition families between immigrant manual labor to white collar knowledge industry workers, fewer overall manual labor jobs such as garment factories, the presence of a welfare state, etc.) make assimilation a much harder proposition.
Interesting to see what Tyler and Alex have to say in response to these arguments…
To that list I would add that, related to TGS, the negative effect of immigration on U.S. educational norms has been more significant than it otherwise might have been. On the other side of the ledger, here are a few relevant factors:
1. The slower influx of Mexicans (100,000 a year vs. a former 500,000 a year) means that assimilation will from now on proceed more rapidly, and certainly more rapidly than the critics had been predicting.
2. The effect of Latino communities in lowering crime rates and revitalizing neighborhoods and cities has been stronger than might have been expected twenty years ago.
3. The notion that Latino migrants to the U.S. might help seed and sustain a broader Latin American economic and democratic boom has become a reality, and this was not obvious twenty years ago.
4. The idea that “the New World” will become a major trading bloc to rival “Chinese Asia” is a more important idea than it might have seemed twenty or even ten years ago. The United States needs extensive Latin connections to maintain its status as active leader of that bloc.
5. Outsourcing is more of a force than we had thought, and the possibility of outsourcing raises the (relative) gains from allowing immigration. I will write more on this in the future, so I’ll leave the details for now.
Overall, the arguments on immigration have changed quite a bit in the last ten to fifteen years, but those changes have cut in both directions.
Pennsylvania black markets in everything
After lifting a ban on porcupine hunting, the Pennsylvania Game Commission ran into a thorny problem: reports of a new black market for the rodents’ meat in Southeast Asia.
Intelligence reports indicated that people were seeking Pennsylvania porcupines to sell illegally for human consumption in Vietnam, commission officials said.
The eight-member commission responded this week by reversing course and ending a nine-month-old policy of virtually unlimited porcupine hunting during most of the year. Instead, it voted to impose a limit of 10 porcupines per hunter per year. The original limit had been six per day.
The story is here. I enjoyed this sentence:
Commission spokesman Jerry Feaser said that he could not comment on specifics of any investigation resulting in the change, but that no known porcupine trading was taking place.
And I learn there is such a thing, legally speaking, as “nuisance porcupines.”
For the pointer I thank Jonathan Geeting.
Hunting Endangered Species
Can hunting save an endangered species? Yes. In Africa hunting has been critical to the conservation of a number of species, despite the sometimes opposition of the United States which can prohibit US citizens from hunting even in foreign countries.
I was surprised to discover, however, that “some exotic animal species that are endangered in Africa are thriving on ranches in Texas, where a limited number are hunted for a high price.” Texas hunters have saved several endangered African species, unfortunately for the animals, the story does not end happily. Video from 60 Minutes below–some excellent material on incentives, ethics and conservation for classroom discussion.
Repugnant
Fifty
Fifty is the smallest number that is the sum of two non-zero square numbers in two distinct ways: 50 = 12 + 72 = 52 + 52.[1] It is also the sum of three squares, 50 = 32 + 42 + 52. It is a Harshad number.
There is no solution to the equation φ(x) = 50, making 50 a nontotient. Nor is there a solution to the equation x – φ(x) = 50, making 50 a noncototient.
The aliquot sum of 50 is 43 and its aliquot sequence is (50,43,1,0). Fifty is itself the aliquot sum of 40 and 94.
There is more here.