Intangible and intellectual capital: A review of the literature

Melbourne Institute Working Paper No. 10/02

Date: June 2002


Elizabeth Webster


This paper reviews theoretical and empirical academic economic studies that discuss what is intangible and intellectual capital and why is it important for society. It begins by discussing issues such as the nature of this capital and how has it changed over time. Subsequently it reviews measures of the importance of intangible and intellectual capital, whether optimal levels of investment in intangible and intellectual capital can be said to exist and, accordingly, whether governments should intervene in the market. On balance, theory favours the view that for reasons associated with uncertainty, non-mortgageability and economies of scale, there is an under-investment in these types of investment. However the extent to which this holds will differ according to the prevalence of uncertainty, non-mortgageability and scale economies for each type of capital item. The most common policies to stimulate the production of intangible capital, especially intellectual capital, are government grants, especially for basic research, patents and other forms of intellectual property, subsidies and research consortia. Optimal policies adjust the incentive to produce so that the marginal costs to society are equal to the marginal benefits.

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