Dec 24, 2012

Economics of Innovation: The Effect of Prizes and Awards

These are excerpts from the conclusions of a new published paper by Brunt, Lerner, & Nicholas (Journal of Industrial Economics, December 2012): 
We have examined one of the longest available datasets of awards for innovation to determine whether prizes spurred technological development. We find that prizes induced competitive entry and that the largest effects are for prestigious medals. . .
Our historical evidence on RASE prizes offers guidance for the design of current inducement prize contests. Mega prizes, such as those offered by the X-Prize Foundation, presuppose that inventors are incentivized by large pecuniary inducements, but R&D costs typically exceed the value of the prize. For example, 26 teams competed for the X-Prize for suborbital spaceflight and collectively spent in excess of $100 million for a ten million dollar prize. Our evidence suggests that non-pecuniary prizes can be particularly effective. They avoid the complex process of linking the magnitude of the prize to the value of a particular technology and inventors are still able to appropriate by winning. The RASE contests offered free publicity and public approbation. Inventors could benefit from the seal of quality ascribed to the invention when selling or licensing their technologies. The RASE lowered administrative costs by using medals rather than financial awards. . . 

Our evidence suggests that in agricultural technologies, the prizes encouraged innovation beyond the patent system alone. . .

Insofar as policy changes require supporting empirical evidence, our findings suggest that inducement prizes for innovation can work.
The abstract:
We examine the effect of prizes on innovation using data on awards for technological development offered by the Royal Agricultural Society of England at annual competitions between 1839 and 1939. We find large effects of the prizes on competitive entry and we also detect an impact on patents, especially when prize categories were set by a strict rotation scheme, thereby mitigating the potentially confounding effect that they targeted only ‘hot’ technology sectors. Prizes encouraged competition and medals were more important than monetary awards. The boost to innovation we observe cannot be explained by the re-direction of existing inventive activity.
A draft of the paper (December 2011) is here.  

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