The Size Distribution of Profits from Innovation

The research reported in this paper seeks to determine how skewed the distribution of profits from technological innovation is -- i.e., whether it conforms most closely to the Paretian, log normal, or some other distribution. The question is important, because high skewness makes it difficult to pursue risk-hedging portfolio strategies. This paper examines data from several sources -- the royalties from U.S. university patent portfolios, the quasi-rents from marketed pharmaceutical entities, and the returns from two large samples of high-technology venture startups. The evidence reveals a distribution closer to log normality than Paretian. Preliminary hypotheses about the underlying behavioral processes are advanced.

The Size Distribution of Profits from Innovation, ZEW Discussion Paper No. 96-13, Mannheim.