Innovators think the government will underpay, killing investment.
Stevens 20, *executive director of the Geneva Network; holds degrees from the London School of Economics and the University of Durham, United Kingdom. **ITIF vice president for Global Innovation Policy. (*Philip Stevens and **Stephen Ezell, 2-3-2020, "Delinkage Debunked: Why Replacing Patents With Prizes for Drug Development Won’t Work," Information Technology and Innovation Foundation, https://itif.org/publications/2020/02/03/delinkage-debunked-why-replacing-patents-prizes-drug-development-wont-work/)
Undervaluing a new medicine in a prize system matters for future innovation. In a situation wherein innovators know their inventions are unlikely to be properly rewarded, they are less likely to invest in R&D and compete for the prize. With the cost of drug development approaching $3 billion, innovators—and the venture capitalists on which many biopharmaceutical start-ups rely—need to be certain the potential rewards are worth the risk of this capital.[55] If there is a real prospect of under-reward, innovators could direct their capital away from medicines and toward sectors in which the expected rate of return would be higher.
Some prize advocates have suggested the problems of under-valuation and expropriation could be avoided by allocating a fixed amount to prize agencies and legally requiring them to disburse all their monies according to pre-set rules and criteria.56 But this would not prevent governments from underfunding the prize committee in the first place. Another challenge is that even for a prize winner, there would still be no guarantee the prize amount would sufficiently cover costs of development. Moreover, the prize would have to be large enough to account for the expected value of winning, which would be low given not only the technical challenges of successfully developing a drug that could be approved by governments, but that is ahead of all other competitors globally that would also hope to win the prize. The problem of under-rewarding invention is likely to be a fatal flaw in a prize system that could seriously disrupt innovation. In turn, that would harm society, as fewer new medicines would be developed.
In her study of the history of prizes, economic historian Khan reiterates these last two mechanical challenges discussed. As she writes, “A systematic assessment of the role of incentives for innovation in the nineteenth century highlights the advantages of market-oriented policies which economize on information, especially in the decentralized determination of prize, value, and ‘winners.’ Market mechanisms also bypassed many of the high transactions costs attendant on negotiating, monitoring, and contracting with applicants and winners.”57