Who is Afraid of Pirates? An Experiment on the Deterrence of Innovation by Imitation

In the policy debate, intellectual property is often justified by what seems to be a straightforward argument: if innovators are not protected against others appropriating their ideas, incentives for innovation are suboptimally low. Now in most industries for most potential users, appropriating a foreign innovation is itself an investment decision fraught with cost and risk. Nonetheless standard theory predicts too little innovation. Arguably the problem is exacerbated by innovators’ sensitivity to fairness; imitators get a free lunch, after all. We model the situation as a game and test it in the lab. We find more appropriation but also more innovation than predicted by standard theory. In the lab, the prospect of giving imitators a free lunch does not have a chilling effect on innovation. This even holds if innovation automatically spills over to an outsider, and if successful imitation reduces the innovator’s profit. Post-experimental tests and the analysis of experiences in the repeated game demonstrate that participants are sensitive to the fairness problem. But this concern is not strong enough to outweigh the robust propensity to invest even more into innovation than predicted by standard theory. The data suggest that this behavior results from the intention not to be outperformed by one’s peers. JEL: C91, D22, D62, D63, H23, H41, K11, L17, O31