Michigan Telecommunications and Technology Law Review Volume 18 | Issue 1 2011 The ndoE wment Effect in IP Transactions: The Case against Debiasing Ofer Tur-Sinai Ono Academic College Follow this and additional works at: http://repository.law.umich.edu/mttlr Part of the Intellectual Property Law Commons, and the Public Law and Legal Theory Commons Recommended Citation Ofer Tur-Sinai, The Endowment Effect in IP Transactions: The Case against Debiasing, 18 Mich. Telecomm. & Tech. L. Rev. 117 (2011). Available at: http://repository.law.umich.edu/mttlr/vol18/iss1/3 This Article is brought to you for free and open access by the Journals at University of Michigan Law School Scholarship Repository. It has been accepted for inclusion in Michigan Telecommunications and Technology Law Review by an authorized editor of University of Michigan Law School Scholarship Repository. For more information, please contact [email protected]. THE ENDOWMENT EFFECT IN IP TRANSACTIONS: THE CASE AGAINST DEBIASING Ofer Tur-Sinai* Cite as: Ofer Tur-Sinai, The Endowment Effect in IP Transactions: The Case Against Debiasing, 18 MICH. TELECOMM. TECH. L. REV. 117 (2011), available at http://www.mttir.org/voleighteen/tur-sinai.pdf This Article contains a critical discussion of recent studies by Christopher Buccafusco and Christopher Sprigman concerning the role of the endowment effect in intellectual property transactions. According to the thesis presented in these studies, the existence of an endowment effect in the markets for IP goods causes inefficiencies. In order to counteract such inefficiencies, the authors argue, IP rights must be weakened in various ways, including shifting toward liability rules, adding formalities in copyright law, and expanding the fair use doctrine. The thesis as presented is groundbreaking and would have broad im- plications.This Article, however,points out several shortcomings of the thesis and its ensuing conclusions. To begin with, the experiments upon which the thesis is based are not representative of real IP markets. To the extent that the endowment effect as illustrated does characterize actual IP transactions,debiasing through law is not an appropriatere- sponse to this phenomenon. As demonstratedin this Article, heightened valuations of IP goods are often driven by emotional attachment, mak- ing such valuations fully consistent with the rational choice model. Furthermore, this Article argues that over-optimism, another factor that inflates the valuation of IP goods, is a phenomenon that society should commend in the context of creative activity rather than con- demn. This Article posits that the authors' proposed changes to the current structure of IP law are not only unnecessary in order to ensure efficiency in the markets for IP goods, but might, in fact, circumvent the ability of our IP system to achieve its prescribed goals. Lecturer, Faculty of Law, Ono Academic College. LL.B., 1997, The Hebrew Uni- versity of Jerusalem; LL.M., 1999, Columbia University; LL.D., 2009, The Hebrew University of Jerusalem. The author expresses his gratitude to Michal Dahan, Daphna Lewinsohn-Zamir, and Michal Shur-Ofry for their helpful comments and suggestions. Deep appreciation is also ex- pressed to the editors of this Journal for their thoughtful review and dedicated editorial efforts. 117 118 Michigan Telecommunications and Technology Law Review [Vol. 18:117 INTRODUCTION ...................................................... 118 I. BACKGROUND...............................................121 A. The Endowment Effect............... ................... 121 B. The Recent Experiments ................... ........ 123 II. CRITICAL ANALYSIS: A MISSTATED PRESENTATION OF THE RESULTS......................... ...... 126 A. Endowment Effect with Respect to Goods Createdby the Owners............................ 126 B. Endowment Effect with Respect to Non-Rival Goods............128 III. CRITICAL ANALYSIS: THE EXPERIMENTS ARE NOT REPRESENTATIVE OF REALITY ........................... 131 A. Assignments vs. Licenses ............................. 132 B. Other Factors that Are Likely to Mitigate the Endowment Effect in Reality .. ................................ 136 IV. CRITICAL ANALYSIS: No JUSTIFICATION FOR INTERVENTION ...... 137 A. What Constitutes an Efficient Allocation in IP Law?..........137 B. The Reasons for the Endowment Effect.... ............ 142 1. The Role of Attachment in the Valuation of IP Assets ....150 2. Over-Optimism Does Not Necessarily Lead to Inefficiency........................153 V. CRITICAL ANALYSIS: THE SPECIFIC PROPOSALS ................. 156 A. Liability Rules..................................159 B. Formalities.................. .................. 163 C. Fair Use.......................................165 D. Ownership ....................... .................... 166 CONCLUSION .................................................. ...... 168 INTRODUCTION Criticism of intellectual property ("IP") rights is as old as the rights themselves.' Even so, over the past decade, intellectual property laws have been under heightened attack from multiple directions, with calls to weaken legal protection awarded to creators and inventors becoming commonplace.2 I. See, e.g., Robert G. Bone, Hunting Goodwill: A History of the Concept of Good- will in Trademark Lw, 86 B.U. L. REV. 547, 570-72, 589-92 (2006) (discussing early criticism of trademark protection based on fears of monopolies); Susan Sell, Intellectual Property and Public Policy in Historical Perspective: Contestation and Settlement, 38 Loy. L.A. L. REv. 267 (2004) (surveying the history of intellectual property protection and de- scribing, inter alia, the major historical controversies concerning copyright and patent protection). 2. See, e.g., Irene Segal Ayers, The Future of Global Copyright Protection: Has Cop- yright Law Gone Too Far?, 62 U. PITT. L. REv. 49, 86 (2000) (arguing that "[tioday, when the 'authors' whose rights are being protected are large international multimedia corpora- tions, expansions in copyright protection restrict and diminish the ordinary individual citizen's access to literary and artistic works"); Julia Alpert Gladstone, Why Patenting Infor- mation Technology and Business Methods Is Not Sound Policy: Lessons from History and Propheciesfor the Future, 25 HAMLINE L. REv. 217, 219 (2002) (arguing that the present patent system "does not encourage new innovation but rather entrenches the monopoly rights Fall 2011] The Endowment Effect in IP Transactions 1 19 In two recent articles, both by Christopher Buccafusco and Christopher Sprigman,3 a new line of criticism of IP law's current regime has emerged.' The articles, based on experiments conducted by the Writers, report the ex- istence of an endowment effect in connection with IP goods. The term "endowment effect" refers to the tendency of people in certain circumstanc- es to value goods more highly when they own them than when they do not.5 Numerous experiments conducted in a wide array of settings establish that individuals typically demand a higher price to give up an entitlement than they would be willing to pay in order to purchase it. 6 The Writers argue that their experiments extend prior research by showing that the valuation of IP goods increases even more when the creator herself owns the good in ques- tion; the Writers name such heightened valuation the "creativity effect." The presence of an endowment effect and a creativity effect in the markets for IP goods suggests, according to the Writers, that such markets suffer from a high degree of inefficiency. In order to deal with the alleged inefficiencies, the Writers propose several changes to IP law, including a shift away from property rules and toward liability rules, the introduction of formalities into copyright law, the expansion of the fair use doctrine, and a broader use of doctrines vesting ownership of creative goods in some person other than the creator. of existing propertied patent holders"); Mark S. Nadel, How Current Copyright Law Dis- courages Creative Output: The Overlooked Impact of Marketing, 19 BERKELEY TECH. L.J. 785 (2004) (exploring how copyright law's prohibition against unauthorized copying and sales may, counter to the law's purported goal, have an overall negative impact on the pro- duction and dissemination of creative content); Tom Saunders, Case Comment, Renting Space on the Shoulders of Giants: Madey and the Future of the Experimental Use Doctrine, 113 YALE L.J. 261 (2003) (criticizing the narrow construction of the experimental use de- fense in patent law); Andrew W. Torrance & Bill Tomlinson, Patents and the Regress of Useful Arts, 10 COLUM. Sci. & TECH. L. REV. 130, 166-67 (2009) (presenting an empirical study showing that the "orthodox" assumption that patents spur technological innovation is not necessarily true). 3. Hereinafter, Christopher Buccafusco and Christopher Sprigman will be referred to interchangeably as "Buccafusco and Sprigman" or collectively "the Writers." 4. Christopher Buccafusco & Christopher Sprigman, Valuing Intellectual Property: An Experiment, 96 CORNELL L. REV. I (2010) [hereinafter Buccafusco & Sprigman, Valu- ing]; Christopher Buccafusco & Christopher Jon Sprigman, The Creativity Effect, 78 U. CHI. L. REV. 31 (2011) [hereinafter Buccafusco & Sprigman, Creativity]. These articles will be collectively referred to as "the Studies." 5. See, e.g., Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. POL. ECON. 1325, 1326 (1990) (describing