No solvency – prizes fail to stimulate innovation – studies disprove CP solvency

Despite the recent boom in prizes we described in the previous section, we found a surprisingly little amount of empirical evidence on the effect of prizes on any dimension of innovation.

According to Jin, Ma, and Uzzi (2021, p. 2), prize research so far has mainly studied how awards change prizewinners’ careers, and it is unclear whether the link between prizes and growth for a single prizewinner’s work extends to changes in the growth of an entire topic. They claimed that current theoretical arguments and empirical work are at a nascent stage.

Sigurdson (2021, p. 6) found no rigorous quantitative studies of the impact of modern large-scale inducement prizes on any dimension of innovation beyond the immediate technical solution to the prize itself. He attributes two main factors to the challenge of knowing if or how inducement prizes impact innovation:

There is little theory for empirical research on modern inducement prizes to test, as much of the economic theory on inducement prizes has considered their use mainly as an alternative to patents.[5] (See Burstein and Murray ([2016, p. 408] for a nice description of the divergence between theoretical and actual prizes.)

There is a lack of counterfactual analysis and an over-reliance on historical case studies, which are often misleading. Sigurdson (2021) found only a handful of studies on prizes that have used counterfactual analysis, which were in many ways different from the types of prizes offered today and thus provide limited comparability to modern prizes like the X Prize.

Moreover, Sigurdson (2021) mentioned that due to many different existing forms of prizes, empirical studies are scattered across quite distinct prize forms. This limits the generalizability of findings from one study to another.

According to Burstein and Murray (2016, p. 408):

“Modern innovation prizes, as typically implemented, are a scholarly mystery. Three literatures speak to such prizes — economic, policy, and empirical — and yet none adequately justifies the use of innovation prizes in practice, explains when they should be chosen over other mechanisms, or explains whether or why they work. As a result, prizes remain little understood as an empirical matter and poorly justified as a theoretical matter.”