KEI issues report on Selected Innovation Prizes and Reward Programs
Thursday, 20 March 2008
On March 20, 2008, KEI published "Selected Innovation Prizes and Reward Programs" (cite as KEI Research Note 2008:1). The paper, which is available on the Internet here: http://www.keionline.org/misc-docs/research_notes/kei_rn_2008_1.pdf, provides the most comprehensive account of historical uses of prizes to induce innovation now available. The introduction to the 51 page report follows:
This is a survey of innovation prizes and reward programs that have been implemented with the primary purpose of stimulating innovation. The purpose of the survey is to provide background and context for those who are considering prizes to stimulate innovation.
In recent years, there has been a growing interest in new ways of rewarding innovation. The themes and rationales for various prize efforts differ considerably from area to area. In some cases, prizes are seen as a way for “crowdsourcing” research and development – reaching out beyond closed communities of employees and contractors or grant recipients. Prizes are also sometimes proposed as an alternative to intellectual property-enforced monopolies, in order to enhance access. But in other cases, prizes simply supplement other, more traditional subsidies and incentives. Governments, philanthropists, businesses and others considering the use of prizes are interested in learning more about the way they have been implemented by others. This research note provides a number of data points to support such investigation.
We have largely, but not exclusively, focused on ex ante prizes that specify, in advance, a desired outcome and a reward for obtaining it in order to incentivize innovation, rather than ex post prizes that honor or reward achievements after the fact. However, the distinctions are not black and white. For example, in some cases, prizes are announced as rewards for achievements in a particular area, such as to promote sustainable energy, but the criteria for winning are not very specific. Such prizes likely stimulate innovation, but they are not as relevant to this survey as prizes that are more clearly obtainable if one performs in less ambiguous ways. We include many different types of innovation prizes, but the survey is weighted toward examples that are more specific regarding the outcomes that are rewarded.
Prizes are grouped by subject matter, and then listed chronologically from earliest to latest as determined by the year in which the prize was initially offered. In addition to the many prize competitions that were actually implemented, several are included that were proposed by legislators or political candidates or parties that so far have not been implemented.
The prizes included in this survey were chosen for a variety of reasons. Some are prominent, and others are not. The list of prizes is not exhaustive and is more complete in some fields than in others. Taken together, the examples are intended to illustrate the possibilities that prizes offer. As is evident from the examples, there is considerable diversity in the purposes, designs, management structures and performance of various innovation prizes. Some prizes have been very successful, while others have been mired in controversy, or did not induce the desired result. The amount of the prizes varies considerably, from $2.56 (the Knuth Reward Checks) to a proposed prize fund of more than $80 billion per year (S.2210, 110th Congress, the Medical Innovation Prize Fund of 2007).
The literature on innovation prizes is surprisingly incomplete, but one does find extensive references to the use of prizes to stimulate innovation in the 18th and 19th centuries, for a wide range of purposes, only a handful of which are reported here. Enthusiasm for the use of prizes seemed to wane in the late 19th century and in the 20th century, only to see a new and still-expanding interest in the early 21st century.
Cash prizes are only one of many different ways to stimulate innovation. Grants and other up-front research subsidies and the prospect of marketing monopolies enforced by patents and other intellectual property rules are also important mechanisms.
The relationship between prizes, intellectual property rights, and grants varies considerably in the examples reported here. In many cases, prizes have been proposed as an additional incentive that would supplement the rewards from exclusive rights associated with patents. In other cases, the prizes are designed as a substitute for, or an alternative to, a patent-enforced monopoly. In the 20th century, government research institutions in France, Germany, the UK and elsewhere largely replaced prizes with systems of grants, and courts have allowed privately endowed prizes to be converted to grant programs.
The advantages of grants and temporary patent-enforced monopolies as mechanisms for financing research into innovation are many. It is often difficult to measure or pre-specify useful outcomes from research, and a system that only relies upon performance, such as prizes, can fail to provide the type of sustainable support that is needed for systems of science and innovation, and low expected probabilities of success may unduly discourage effort or investment, factors that have certainly contributed to the rise of a grants economy.
The traditional patent system provides opportunities for inventors and entrepreneur to identify useful innovations that have commercial value, outside of the supervision of a tradition-bound and cautious bureaucracy, and the market-driven valuation of patented inventions creates enormous incentives for investment in the development and commercialization of new products and services. In terms of resources, grants and the prospect of temporary monopolies have generated enormous resources for research and development activities, far more than the level of funding now available for prizes.
Prizes, however, offer certain important advantages over grants or temporary monopolies. When designed well, prizes can reach a wider community of problem solvers than will grants and, like the prospect of a commercial monopoly, bring in new actors following unconventional approaches, and stimulate private decision-making and entrepreneurship. Prizes can be used when the desired output is not patentable, or the use of the patent system is too costly and bureaucratic, or when the private market for the outcome is inadequate or does not exist. If prizes are used as an alternative to a monopoly as the incentive for private investment, it is possible to avoid a wide range of costs associated with monopolies, including not only high prices and barriers for access to the inventions, but also obstacles to follow-on innovation. Prizes can also be tailored as incentives in ways that are simply not possible with rewards that are tied to the monopoly prices of the outputs. Some of the areas where prizes are thought to have important advantages are cases where it socially and economically important to have marginal cost pricing and/or free access to the outputs of the R&D efforts, or where it is important to reward the development of translational and transition technologies and products that will not by themselves be commercially viable, but which serve to advance the state of the useful arts and sciences.
All systems to finance innovation have shortcomings. The challenges associated with the use of prizes are several, including difficulty in specifying and measuring the outcomes to be rewarded, and the financing of the rewards.
The majority of the prizes discussed below are sui generis in nature, focusing on specific problems to be addressed, and outside of specific prize endowments, without a sustainable system of finance. For example, all of the new prizes in the areas of transportation, power, and climate change follow this traditional approach of sui generis specification of rewarded outcomes and intellectual property rules, and episodic funding.
In the minority, but of interest, are the more ambitious efforts to use prizes as a systematic mechanism to reward innovation, with sustainable systems of finance. The often disparaged Soviet Union system of rewarding innovation with “Authorship Certificates” achieved sustainable finance by tying prize rewards to a fraction of savings achieved by innovations. While the now discontinued Soviet approach did achieve successes in some areas, it operated in an economy where inventors had to rely upon the State to provide the planning, capital, energy and risk necessary to exploit the inventions, which was a severe shortcoming. An older experiment was the system used in Lyon, France in the 18th Century to reward innovations in the textile industry. Lasting many decades, and financed both through a tax on silk imports and contributions from members of the Grand Fabrique textile guild, the Lyon system is considered by many to be a powerful and successful example of the use of prizes to stimulate both innovation and the diffusion and use of the innovations, in a system where invention was considered a public good. The Lyon system also explicitly rewarded technology transfer and sequential innovation. More recently, the proposed U.S. Medical Innovation Prize Fund would reward private drug developers who are successful at registering new medicines that improve healthcare outcomes with enormous levels of sustainable funding tied to annual GNP levels, completely eliminating the need for monopolies on new medicines.
No program to stimulate innovation guarantees success. The prize competitions discussed below sometimes succeeded impressively, but not always. Failures are not unique to prizes. For example, despite billions of dollars in grants from the National Institutes of Health and other donors and the existence of strong exclusive rights for patents, there is a paucity of progress for the treatment of Alzheimer’s disease. Similarly, there has been almost no significant innovation in terms of tuberculosis testing for more than a century. The administration of some prizes were fraught with difficulty, but so are some grant programs, and patent systems are subject to a plethora of well-known shortcomings. Each instrument has strengths and weaknesses, and the results will vary.
Today many philanthropists, businesses and governments are looking to prizes as an incentive mechanism that can complement or compete with grants or marketing monopolies. The context is very important, as the goals and problems that motivate the creation of the prizes vary considerably. At a minimum, prizes can extend the community of actors working to solve innovation challenges beyond those who would be supported by grant programs. Prizes can also be used to overcome access problems otherwise caused by monopolies, or to stimulate innovation in areas where patents are irrelevant or ineffective. But prizes may also be used in combination with grants and/or marketing monopolies. Prizes are, however, increasingly becoming part of the policy framework for stimulating innovation, and play an important role in shaping our knowledge ecology.
The 51 page report is available here: http://www.keionline.org/misc-docs/research_notes/kei_rn_2008_1.pdf