This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research. The volume, titled "The Rate and Direction of Inventive Activity: Economic and Social Factors," was published by Princeton University Press in 1962. The chapter "Economic Welfare and the Allocation of Resources for Invention" by Kenneth Arrow discusses the role of invention in economic welfare and the challenges of allocating resources for invention. Arrow interprets invention broadly as the production of knowledge and examines how economic and social factors influence the allocation of resources for invention. He highlights the challenges of perfect competition in achieving optimal resource allocation, particularly in the presence of uncertainty, indivisibilities, and inappropriability. Arrow argues that the competitive system may fail to achieve optimal resource allocation due to these factors, and that the economic characteristics of information and invention are crucial in understanding this issue. He also discusses the role of information as a commodity and the difficulties of allocating resources for invention in the presence of uncertainty. Arrow concludes that the competitive system may underinvest in invention and research due to the risks involved, the limited extent of appropriation, and the increasing returns in use. He also examines the incentives for innovation under competitive and monopolistic conditions and argues that the incentive to invent is less under monopolistic than under competitive conditions. Finally, Arrow discusses the role of government in financing research and invention, arguing that it may be necessary for optimal allocation. The chapter also highlights the challenges of allocating resources for invention in the presence of uncertainty and the importance of information as a commodity.This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research. The volume, titled "The Rate and Direction of Inventive Activity: Economic and Social Factors," was published by Princeton University Press in 1962. The chapter "Economic Welfare and the Allocation of Resources for Invention" by Kenneth Arrow discusses the role of invention in economic welfare and the challenges of allocating resources for invention. Arrow interprets invention broadly as the production of knowledge and examines how economic and social factors influence the allocation of resources for invention. He highlights the challenges of perfect competition in achieving optimal resource allocation, particularly in the presence of uncertainty, indivisibilities, and inappropriability. Arrow argues that the competitive system may fail to achieve optimal resource allocation due to these factors, and that the economic characteristics of information and invention are crucial in understanding this issue. He also discusses the role of information as a commodity and the difficulties of allocating resources for invention in the presence of uncertainty. Arrow concludes that the competitive system may underinvest in invention and research due to the risks involved, the limited extent of appropriation, and the increasing returns in use. He also examines the incentives for innovation under competitive and monopolistic conditions and argues that the incentive to invent is less under monopolistic than under competitive conditions. Finally, Arrow discusses the role of government in financing research and invention, arguing that it may be necessary for optimal allocation. The chapter also highlights the challenges of allocating resources for invention in the presence of uncertainty and the importance of information as a commodity.