Prizes don’t spur Innovation.

We found little quantitative empirical evidence on the effect of prizes on innovation, arguably due to two factors: First, as there is a substantial divergence between economic theory and actual prizes implemented in practice, there is little theory for empirical research to test. Second, it’s difficult to do a counterfactual analysis, and there is an over-reliance on historical case studies, which are often misleading.

We found only a few studies on the impact of prizes on innovation and intermediate outcomes that have used a convincing counterfactual analysis (summary table here):

For inducement prizes, we found only one study establishing a causal effect of prizes on the number of patents as a proxy for innovation in 19th / early 20th century England (Brunt, Lerner, & Nicholas, 2012). Two other articles focused on intermediate outcomes and found that prizes increased the number and diversity of coauthor collaboration and influenced the direction of research (Sigurdson, 2021).

For recognition prizes, we found stronger evidence on their innovation-related and field-shaping effects, including large positive effects on the number of publications, citations, entrants, and incumbents for prizewinning topics since 1970 (Jin, Ma, & Uzzi, 2021). Moreover, there is evidence of recognition prizes boosting patents in late 19th and early 20th century Japan (Nicholas, 2013). We also found evidence that prizes have become increasingly concentrated among a small group of scientists and ideas in recent decades (Ma & Uzzi, 2018), and that there may be negative spillover effects of prizes on the allocation of attention (Reschke, Azoulay, & Stuart, 2018).

Inducement prizes can leverage substantial amounts of private capital, with figures pointing to 2-50 times the amount of private capital relative to the cash rewards. We haven’t vetted these numbers, but our best guess is that the average large inducement prize (≥ $100,000) leverages 2-10 times the amount of private capital relative to the cash rewards (80% confidence interval).

There seems to be no consensus in economic theory about when to choose prizes for innovation (over patents or grants). The policy literature provides some rules of thumb: 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 climate change interventions).

We have found relatively little empirical (or theoretical) evidence on how to effectively design a prize. The available evidence suggests:

There is only a weak relationship between cash amounts and innovative activity and outputs. It appears that (prestigious) medals provide stronger incentives than monetary rewards.