Rewarding failure

Abstract Research is a messy enterprise, fraught with dead ends and missed opportunities. When research is successful, intellectual property law offers market-driven rewards. When research is unsuccessful, however, the investment is treated as a waste—an unlucky gamble in the horse race of innovation. But failed research investments are not valueless. Instead, they generate useful information that increases the odds of success on subsequent research efforts. From a social perspective, then, firms should disclose information about research failures so that other firms can avoid duplicative, fruitless lines of inquiry. Unlike with successful research investments, however, firms have no easy opportunity to capture the value of information generated by their unsuccessful research. Indeed, the law offers no coherent approach for harvesting the social value of the information generated by failed research efforts. As a result, discoveries of what “does not work” are not optimally disclosed. In this paper, we develop a simple sequential-stage model to identify the shortcomings of this one-sided reward system. We explore possible legal and institutional solutions to the problem, focusing on informal bankruptcy alternatives, patent-like “propertization” mechanisms, and prizes. Our results shed light on the potential and limits of these mechanisms for aligning private and social incentives for research.