Scotchmer, Suzanne (2013) Patents in the University: Priming the Pump and Crowding Out. TSE Working Paper, n. 13-421

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Abstract

The Bayh-Dole Act allows universities to exploit patents on their federally sponsored re-
search. University laboratories therefore have two sources of funds: direct grants from
sponsors and income from licensing. Tax credits for private R&D also contribute, because
they increase the profitability of licensing. Because Bayh-Dole profits are a source of funds,
the question arises how subsidies and Bayh-Dole profits fit together. I show that subsidies
to the university can either "prime the pump" for spending out of Bayh-Dole funds, or can
crowd it out. Because of crowding out, if the sponsor wants to increase university spending
beyond the university's own target, it will end up funding the entire research bill, just as if
there were no profit opportunities under the Bayh-Dole Act. A subsidy system that requires
university matching can mitigate this problem.