Prizes often fail.

If an invention is valuable, the patent is going to reward it by profits in the market. But if the invention is useless, they're going to get nothing. And society also benefits, because the patentee discloses all of the information to the public. But what I point out is that prize awards belong to what I call administered innovation systems. These are top down arrangements, where economic decisions about rewards and values, and the allocation of resources, are going to be made by panels and by judges who will never have as much information as the market. Usually, these sorts of prize awards are very secretive. They don't tell you how and why they arrived at their decision. And certainly, they never put in place any mechanism to reveal information to everyone in the field. So I think that administered systems are a lot like command economies, because it's impossible for administrators to come up with the correct value. You have too low a prize, and that's a problem. You have too high a prize, and that also creates distortions and misallocates resources.

Suppose that you were to offer $200 million for a superior mousetrap. Well, your prize is surely going to attract a posse of people to try to fix your root problem. But at the same time, this disproportionate payment is going to have unforeseen consequences, like inducing oncologists to switch from finding cures for cancer, to competing for your mousetrap payout. And of course, there is no guarantee that the invention you select is actually going to be successful in the general marketplace.

I would conclude by pointing out that this misallocation of resources was very evident in the case of the Google Lunar XPRIZE, and this was a moonshot price of $30 million. For 10 years, this competition went on, and Google got 10 years of free publicity and insights and information from the competitors for the prize. Then Google canceled the award, so nobody actually got the $30 million. So my take on this is that price awards are great for the monopsonist who offers the award. Markets are generally better for the rest of us. In the prize system, one person wins a prize. In the market, everyone can get a prize.