May 2001Inventors and Pirates:Creative Activity and Intellectual Property RightsHerschel I GrossmanBrown University and Russell Sage FoundationAbstr actThis paper analyzes a model in which creative activity and the security of intellectualproperty rights are jointly determined, both depending on the choices made by potentiallycreative people either to engage in creative activity or to be pirates of the ideas created byothers and on the decisions made by people who are engaged in creative activity to allocateresources to guarding the ideas that they create from pirating. The exogenous variables in thismodel are the environment for pirating, which includes the legal system, and the interpersonaldistribution of talent. Among other results, the analysis shows that, holding Þxed the averagelevel of talent, the existence of geniuses makes intellectual property rights less secure, butalso can result in a larger saleable value of ideas being created. The analysis also showsthat intellectual property rights probably are too secure, in that the amount of time andeffort allocated to guarding ideas from pirating probably is larger than the amount that wouldmaximize the net saleable value of ideas created.JEL classiÞcation numbers: O31, O34Keywords: Creative Activity, Intellectual Property Rights, PiratesI thank Andrew Gruber for useful information, my colleagues in the Brown Workshop inMacroeconomics and Growth for valuable modeling suggestions, and participants in a semi-nar at the University of Delaware for helpful comments.It is a commonplace idea that the incentive to engage in creative activity depends onthe security of intellectual property rights. In analyzing this dependence the literaturetypically takes the security of intellectual property rights to be a direct consequence of thelegal system, and, consequently, to be exogenous with respect to creative activity.1Thisexogeneity assumption, however, neglects an essential part of the story, in that it abstractsfrom the choices that link the legal system to the security of intel lectual property rights.The present paper focuses on these choices. The analysis involves a model in whichwithin a g iven environment, which includes the legal system, both creative activity and thesecurity of intellectual property rights depend on the decisions made by potentially creativepeople either to engage in creative activity or to be pirates of the ideas created by others andon the decisions made by people who are engaged in creative activity to allocate resourcesto guarding the ideas that they create from pirating. In this model, in contrast to thestandard analysis, creativ e activity and the security of intellectual property rights are jointlydetermined, and the security of intellectual property rights is endogenous.2The exogenous variables in this model are the environment for pirating and the inter-personal distribution of talent. The environment for pirating reßects both the technology ofpirating and features of the legal system, such as patent law, copyright law, and their admin-istration, that either impede or facilitate pirating. The interpersonal distribution of talentallows for the existence of geniuses, who are much more talented than ordinary potentially1Stanley Besen and Leo Raskind ( 1991) provide an overview of this literature together with a summaryof the relevant features of the legal system. David Gould and William Gr uben (1996) and Walter Park andJuan Carlos Ginarte (1997) report empirical estimates of how economic growth depends on aspects of thelegal system that relate to intellectual prop erty rights.2Dan Usher (1987) developed a seminal model in which people decide whether to be producers or predatorsand in which producers also decide how much time and effort to put into guarding against predators. Thepresent analysis uses the basic structure of the models of producers, predators, and guarding against predatorsdeveloped by Minseong Kim and m yself and summarized in Grossman (1998). For other examples of usesof this modeling structure, see Grossman and Kim (2000, 2001).1creative people.This analysis deÞnes pirating to include any appropriation of the saleable value of ideascreated by others, whether such appropriation involves the violation of patents and copy-rights, as in the case of pirated editions of books, or merely the creation of unauthorizedimitations of ideas, as in the case of “knoc k-offs” of original designs. For simplicity, theanalysis abstracts from differences among scientists, authors, composers, and artists, usingthe generic term “inventors” to denote people who engage in creative activity. The analysisassumes that each potentially creative person’s choice to be either an inventor or a piratedepends on whether being an inventor or a pirate would yield more wealth for him (or her).The guarding of ideas from pirating includes any costly activity that decreases the netsaleable value of the ideas that inventors create, but also decreases the ability of pirates toappropriate the saleable value of these ideas. Ways of guarding ideas include everythingfrom physically securing the premises at which either creative activity takes place or ideasare implemented, to Þling patents, t o hiring lawyers to enforce patents and copyrights, todirecting creative activity to ideas that are intrinsically less readily pirated, even if theseideas are less valuable than alternative ideas, to developing and implemen ting strategies,like encryption, that make ideas harder to pirate. Each of these ways of guarding ideasrequires either the direct use of an inventor’s time and effort or the spending of part ofan inventor’s gross income on hiring other people, such as lawyers, to act as guards. Forsimplicity the analysis abstracts from different ways of guarding ideas, assuming only thatinventors allocate a fraction of their time and effort either directly or indirectly to guardingtheir ideas. The analysis assumes that inventors choose this fraction to maximize theirwealth.The paper begins by analyzing a simple model in which each potentially creative person isequally talented. This analysis shows how, through the choices made by potentially creativepeople, the saleable value of ideas created and securit y of intellectual property rights depend2on the environment for pirating. The paper then extends the model by assuming that a smallfraction of the potentially creative people are geniuses. The analysis of this