Innovation Policy and the Economy

April 20, 2010
Joshua Lerner and Scott Stern, Organizers

David M. Cutler, Harvard University and NBER
Where are the Health Care Entrepreneurs? The Failure of Organizational Innovation in Health Care

Medical care is characterized by enormous inefficiency: high costs and poor quality outcomes. In other industries characterized by inefficiency, efficient firms expand to take over the market, or new firms enter to eliminate inefficiencies. This has not happened in medical care, however. Cutler explores the reasons for this failure of innovation. He identifies two factors as being particularly important in stagnant market organization: public insurance programs that are oriented to volume of care and not value, and inadequate information about quality of care. Recent reform efforts may address each of these problems.

Raymond Fisman, Columbia University and NBER, and Eric Werker, Harvard Business School
Innovations in Governance

Fisman and Werker explore the innovations that have led to better rules for promoting investment and growth. Some policymakers have tinkered with their country's institutions; some have undertaken wholesale changes; still others have attempted to influence the rules in other countries. This research surveys past attempts at governance innovation, from private governance in India’s industrial cities to cross-border government efforts, like Singapore’s Suzhou Park outside of Shanghai. It considers norm-changing mimes in Bogota and rule-of-law enforcing anti-corruption authorities in Hong Kong. From these recent experiences, Fisman and Werker try to extract a few key principles that characterize successful governance innovations. These include: competition, which puts pressure on policymakers to improve institutions; information, which provides necessary knowledge to citizens that can help them push for improved governance; trade in institutions, which allows effective institutions to move across borders; and shifting culture, that is, the jolting of norms to be rule-compliant. Finally, they use these principles – combined with historical precedent – to evaluate some recent proposals for governance innovation.

Joshua S. Gans, University of Melbourne
When is Static Analysis a Sufficient Proxy for Dynamic Consequences? Reconsidering Antitrust and Innovation

Gans examines the claim that dynamic considerations play a particularly important role in certain industries (in particular, those characterized by high rates of product innovation) and consequently render antitrust analysis based on static concepts inappropriate or misleading. By expositing and applying the fully dynamic model of Segal and Whinston (2008), he argues that in many cases static analyses are not misleading and that dynamic considerations (such as competition for the market) are not decisive in these analyses. However, dynamic considerations can be important when the predominant mode of commercialization by innovative entrants is via cooperation, rather than competition with incumbent firms; examples of cooperation include acquisition and licensing. Therefore, a vigilant approach to antitrust enforcement may be necessary in certain circumstances when dynamic considerations play a major role.

Suzanne Scotchmer, University of California, Berkeley and NBER
Cap and Trade, Emissions Taxes, and Innovation

Emissions taxes and carbon caps can both lead to efficient production of energy, in the sense of controlling carbon emissions to the extent that is efficient with existing technologies. However, the regulatory policy has a second objective, which is to create incentives to develop lower-carbon technologies. With both objectives in mind, does one policy dominate the other? Scotchmer shows how tax regulation can do a better job of encouraging innovation and of ensuring that all energy producers use the cleaner technology. Under both tax regulation and carbon regulation, the royalty controls the price of energy. However, in the case of carbon regulation, the proprietor must expand energy supply in order to earn revenues. This may reduce gross profits in the energy sector and lead to lower rewards than under tax regulation. Making it worse, the proprietor might avoid price erosion by diffusing the clean technology only partially, so that the dirty technology stays in use.

Benjamin F. Jones, Northwestern University and NBER
As Science Evolves, How Can Science Policy?

Getting science policy right is a core objective of government that bears on scientific advance, economic growth, health, and longevity. Yet the process of science is changing. As science advances and knowledge accumulates, ensuing generations of innovators spend longer in training and become more narrowly expert, shifting key innovations later in the life cycle and from solo researchers toward teams. Jones summarizes the evidence that science has evolved -- and continues to evolve -- on both dimensions. He then considers science policy. The ongoing shift away from younger scholars and toward teamwork raises serious policy challenges. Central issues involve: 1) maintaining incentives for entry into scientific careers as the training phase extends; 2) ensuring effective evaluation of ideas (including decisions on patent rights or research grants) as evaluator expertise narrows; and 3) providing appropriate effort incentives as scientists increasingly work in teams. Institutions such as government grant agencies, the patent office, the science education system, and the Nobel Prize come under a unified focus in this paper. In all cases, the question is how these institutions can change. As science evolves, science policy may become increasingly misaligned with science itself – unless science policy evolves in tandem.

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