An Organizational Approach to the Design of Patent Law

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6 VERTINSKY FINAL_JAD (DO NOT DELETE) 2/27/2012 2:20 PM 238 MINN. J. L. SCI. & TECH. [Vol. 13:1 formation is replaced with presumptions of bounded rationality that reflect the limited capacity people have to obtain and process information in most situations. 114 Instrumental rationality is rejected (at least in part) and choices are instead based on mental models informed by values, norms, and experiences. 115 Bounded rationality provides opportunities for opportunistic behavior in the face of incomplete contracts and imperfect contractual enforcement, and creates transactions costs in the coordination of economic activities. 116 It is because of these imperfections that institutions and alternative modes of organizing economic activities become important; in the absence of these imperfections all activities could be conducted through market exchange and the use of enforceable contracts. 117 Property rights and their interpretation become important because they necessitate and structure transactions and influence transaction costs as a part of the functioning of such markets. 118 Perfect market benchmarks are replaced with comparisons of alternative outcomes in imperfect markets. As F. Scott Kieff explains: NIE emphasizes the use of comparative institutional analysis to look at the different characteristics of institutions and what impact they have on individuals and organizations over time. Such an approach means we should ask not only what we want to achieve, but also which mix of formal and informal institutions will work better in achieving our set of goals. 119 114. The concept of bounded rationality is attributed to Herbert Simon. See also Williamson, The New Institutional Economics: Taking Stock, Looking Ahead, supra note 75, at 600–01; Douglass C. North, The New Institutional Economics and Development at 1 (Wash. U. Working Paper, 1992), available at http://129.3.20.41/eps/eh/papers/9309/9309002.pdf (“What [NIE] abandons is instrumental rationality—the assumption of neoclassical economics that has made it an institution-free theory.”). 115. See Douglas C. North, The New Institutional Economics and Third World Development, in THE NEW INSTITUTIONAL ECONOMICS AND THIRD WORLD DEVELOPMENT 20–21 (John Harris et al. eds., 1995); see also North, supra note 114; Williamson, supra note 75, at 600–01. 116. See Williamson, supra note 75, at 600–01. 117. These same limitations apply to the institutions themselves, as North points out, resulting in the persistence of imperfect institutions, and the need for pragmatic approaches to policy design. North, supra note 115, at 17–18, 24–26. 118. See Heald, supra note 100; Merges, Expanding Boundaries of the Law: Intellectual Property and the Costs of Commercial Exchange, supra note 41, at 1590–91; Barnett, Sharing in the Shadow of Property: Rational Cooperation in Innovation Markets, supra note 100. 119. Kieff, supra note 9, at 339.
6 VERTINSKY FINAL_JAD (DO NOT DELETE) 2/27/2012 2:20 PM 2012] AN ORGANIZATIONAL APPROACH 239 This emphasis becomes particularly important when evaluating the opportunities that patent laws offer as policy levers in improving economic outcomes in imperfectly competitive markets that are subject to other forms of public and private orderings. 120 4. Seek Robustness to the Political Economy of Rule Making and Engage in a Comparative Analysis of Alternative Rules The political economy of rule design and the comparative analysis of alternative regulatory strategies within a given context are important parts of policy analysis. Those designing and implementing the rules are themselves subject to the limitations of bounded rationality and opportunism. 121 Institutions will inevitably be imperfect, and opportunities for change will be constrained by path dependence and influenced by ideas and ideologies. 122 The design and enforcement of patent laws are both shaped by the social, cultural, and political structures in which systems of innovation are embedded, and by cognitive processes such as ideologies regarding ownership and attitudes towards risk. 123 Alternative forms of regulation are evaluated in light of the existing institutional environment and the constraints operating on processes of rule change and adoption. 124 In evaluating institutions such as patent laws and how they change, the organizational approach retains the methodological individualism inherent in traditional neoclassical-based approaches. 125 Institutions such as patent laws are understood as “systems of rules created to offset uncertainty and risk by providing a social structure that allows humans to gain certain 120. See Coase, supra note 42, at 195. See also Nancy T. Gallini & Susan Scotchmer, Intellectual Property: When Is It the Best Incentive System?, 2 INNOVATION POL’Y & ECON. 51, 71–72 (2002) (asserting that private contracting can alter conclusions about optimal patent design and public and private instruments and this may be complementary in reducing social costs). 121. See North, supra note 115, at 17–18, 23. 122. See North, supra note 92, at 97–98, 109–110. 123. See North, supra note 115, at 18–20. 124. See Williamson, supra note 75, at 601. 125. NIE does not escape the limitations of methodological individualism. See, e.g., Robert B. Ahdieh, Beyond Individualism in Law and Economics 46– 47(Emory Pub. Law Research Paper No. 9–78, 2009), available at http://ssrn.com/abstract=1518836 (to access article, select One-Click Download) (arguing that continuing methodological individualism limits understanding of institutions). In addition methodological individualism, may not adequately capture certain instrumental goals of patent law, such as goals that are based on natural rights.
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An Organizational Approach to the Design of Patent Law

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