The literature proves that inducement prizes are under-researched but can work. However, it contends that evidence is in favor of recognition instead.

Inducement prizes have received little attention in the empirical and theoretical literature. The only direct evidence we found on inducement prizes having an effect on innovation comes from a study on prizes for agricultural technology in late 19th and early 20th century England. While the available literature points somewhat towards inducement prizes having favorable outcomes, we don’t think the evidence provides a strong case for using inducement prizes. A noteworthy finding is that inducement prizes can leverage large amounts of private capital (~2-50x the cash reward), but we don’t know how representative this finding is.

We think that there is somewhat more (and more convincing) evidence in favor of recognition prizes. We would advise having a deeper look into the literature on recognition prizes, though our guess is that there is not much more to be found than what we already have. A good starting point could be to skim further articles we found on recognition prizes but did not have time to review (listed ).

While the literature does not provide very concrete guidelines on when prizes should be used (versus other incentive mechanisms), a rule of thumb seems to be that inducement prizes are most useful (1) when the goal is clear but the path to achieving it is not, and (2) in industries that are susceptible to underproduction of innovation due to market failure (e.g. neglected tropical diseases or technology to address climate change). This holds similarly for AMCs, but it is less clear (at least to us) how to choose between inducement prizes and AMCs.

It is also not very clear how an effective inducement (or recognition) prize should be designed. Most of the evidence comes from field or lab experiments on relatively small-scale prizes, which are very different in nature than grand innovation prizes, like the X Prize. One noteworthy general finding is that the prestige and visibility of a prize seems to matter much more than the cash reward in incentivizing participants. The cash reward seems to matter mostly insofar as it increases the prize’s visibility, but there is only a weak correlation between the two. Thus, we would advise against spending millions on a large cash reward and think carefully about how to create prestige around a prize.

Although the evidence base on prizes is pretty limited, we are doubtful whether funding more research on prizes is worthwhile. Prizes, especially large-scale prizes, are very complex and their success depends on many different parameters. For example, findings that hold for small-scale prizes in one context may not extend to another, and there is always the challenge of finding or constructing an adequate counterfactual. Our current belief is that the amount and cost of research needed to sufficiently resolve key uncertainties is disproportional compared to its benefits. Thus, we would not recommend funding prizes just for research purposes.

Advance market commitments, a fairly novel concept, have been endorsed by several highly renowned economists. So far, there has only been one case study that yielded promising results, but it also received critique. While the pneumococcal pilot AMC seemed to have been successful in establishing and speeding up vaccine rollout in poorer countries, it may not have been very cost-effective relative to other vaccine interventions. Moreover, the pilot focused deliberately only on establishing supply capacity for an already existing vaccine, not on inducing R&D activity. We would recommend looking into the possibility of funding an AMC to test whether it can actually be effective at inducing R&D activity, as it was originally conceived. Moreover, we would advise having a deeper look at AMCs, particularly to get a better sense of how promising other proposals and applications are.

Overall, we came away somewhat more optimistic about recognition prizes and AMCs and somewhat less optimistic about inducement prizes, relative to our priors. Nonetheless, we believe that inducement prizes are still worth considering, but only in certain circumstances and contexts, with more focus on building prestige than on increasing the cash rewards, and with a very careful design that is informed by what went well and what went wrong in historical prizes and more recent case studies. We don’t have a firm conclusion regarding Grand Challenges, as we only had time to review them very briefly and didn’t encounter anything striking that affected our bottom-line conclusions.