Traditional credit and debit cards are not the only plastic payment mechanisms contributing to the decline of paper at the point of sale. Prepaid cards, which include products such as gift cards, travel cards, and payroll cards, are quickly replacing a variety of paper payment products, including gift certificates, travelers’ checks, and paychecks. In addition, merchants, banks, and employers are announcing new stored value card initiatives almost weekly. Also contributing to the prepaid card buzz are impressive estimates as to the product’s potential.
MasterCard and Visa, for example, both estimate that the prepaid market could grow to over $2 trillion and include business-to-business, consumer to consumer, and government to consumer transactions.1 Although such volumes are not expected for many years, prepaid card issuers are already being confronted with a myriad of legal issues that threaten to impede the technology’s growth. It is unclear, for example, whether a host of federal and state statutes that cover traditional payment products can or should reach prepaid cards. Overall, the future of prepaid card law is unsettled.
This paper assesses the importance of intellectual property (IP) for innovation and welfare in the context of a model of industry dynamics where innovations are generated by financially constrained entrepreneurs. The increase in IP protection and the development of alternatives for the financing of high-tech start-ups (most notably, venture capital) are in the list of factors that may have facilitated the unprecedented prosperity of innovative entrepreneurial activities since the early 1990s, which also includes the opportunities and technological changes associated with the information technology (IT) revolution, the reduction in setup costs and other barriers to the creation and development of new firms, and the emergence of a new “entrepreneurial culture” that has increased the social recognition and other rents associated with being and succeeding as an entrepreneur.
Regarding IP protection, it is commonly understood that, in the United States, the creation of a unique Court of Appeals of the Federal Circuit in 1982 strengthened the position of patent holders against potential infringers. Other legislative changes, such as the 1984’s Semiconductors Act or the extension of patent duration to 20 years, has contributed to this increase in protection. However, there is considerable empirical and theoretical controversy on whether these reforms actually promote innovation. Some quantitative assessments based on US data conclude that higher protection would induce more innovation (Denicol`o (2007)), while others suggest that the greater protection brought about by recent reforms may have actually reduced innovation (Levin et al. (1985), Hall and Ziedonis (2001)). Practitioners express their doubts regarding the role of IP protection by referring to issues such as the “tragedy of the anti-commons” that deems strategic patenting and patent stacking as obstacles to innovation (Heller and Eisenberg (1998)). At a theoretical level, advice against excessive IP protection can be found in papers such as Boldrin and Levine (2002), Hunt (2004) or Bessen and Maskin (2006). None of these papers, however, makes explicit reference to the innovators’ financing problem and the direction in which financial constraints might change their normative prescriptions.
For many years, one of the major issues in macroeconomics has been the link between unemployment, wages and productivity. Indeed, in their influential work, Bruno and Sachs (1985) suggested that the rise in the real wage gap, defined as the proportion of real wages in excess of the full employment marginal productivity of labor, was one of the main contributor to the rise in the OECD unemployment rate during the 1970’s. However, ten years after their finding, Gordon (1995) pointed out that an examination of the wage gap data for Europe and the US became obsolete during the 1980’s. He showed that there was no cross-country correlation between the increase in unemployment and the increase in the manufacturing wage gap during this period. Together with these two studies, there was an abundant literature dealing with the link between the wage-productivity gap and unemployment, showing a small positive effect or even the lack of support for the wage gap as a determinant of unemployment.
