Research investment differs from physical investment, because it is difficult to exclude third parties from the assets produced by the research process. As noted in the classic contribution by ARROW (1962), the creator of these assets will typically fail to appropriate most or even all of the social returns it generates. Much of the social returns will accrue as spillovers to com- peting firms and consumers. The appropriation problem is likely to lead to significant under- investment in R&D by private firms (JAFFE et al., 2002). Innovation incentives may increase if the private innovator can appropriate the expected innovation rents. The creation.
