October 25, 2006

Minds on the Prize

There has been a lot of discussion lately on a topic that often comes up in my economics classes: the use of prizes as incentives for innovation. Despite the long history of using prizes to spur technological development, the renewed interest in this tool is a good sign because it is underused and could yield tremendous global benefits.

The underlying reasons why prizes may represent one of the most effective and efficient ways to accelerate innovation are relatively straight-forward:

1. All entities, but particularly governments, are notoriously bad at picking technological winners, especially in emerging fields. For example, the energy or telecommunications technologies that may prove to be the best in the coming decades may not even be on the radar screen right now. Creating prizes for technological developments allows scientists and engineers wide latitude in figuring out the best ways to make advancements. For example, while directly supporting hybrid technology may help to increase innovation in this industry, a prize for the first group to come up with a 100 mpg car creates incentives for development within a much broader range of technologies, some of which may ultimately be superior to hybrid technology.

2. Prizes engage the broadest group of innovators possible because by their definition they don’t favor any group or industry. As we are all well aware, sometimes the best inventions come from people’s backyards or garages, or across borders and therefore, prizes are some of the most efficient generators of creative and competitive activity.

3. Prizes do not just confer money on the winners, but also prestige. Whereas direct support of industries or groups provides only a monetary reward, many scientists (who have egos just like the rest of us) may be extra-driven by a desire for the media attention and fame that accompanies winning a competition; the same amount of money spent on directly supporting given research may actually generate additional work if used instead as prize money.

The potential uses of prizes to help generate new technology are almost limitless, but there are a few areas where it would be especially beneficial to world society: new medicines and new environmental technology. Probably the best possible uses of prizes would be to encourage the development of a vaccine for AIDs or malaria or for new highly efficient and clean energy technologies.

Prize money must be sufficiently high to cover the costs of R&D by at minimum an order of magnitude; since most players have a small probability of winning they will only spend their own money to take the risk if the prize is very big. This might mean a prize of say $50-$100 billion for a major medical cure or $10 billion for new energy technology, but compared to the potential benefits to the world even such sums are a relatively small price to pay. In addition, these sums would only be paid if the desired technologies were developed, whereas most forms of subsidies don’t guarantee almost any desirable outcome.

Given the huge sums the world already spends on fighting disease and environmental regulation, I can think of almost no better way to commit resources than providing incentives for the best minds in the world to focus their attention on the world’s most pressing problems.

Jason Scorse