Prize systems empirically can incentivize innovation just as well as patents

Do prizes successfully incentivize innovation? Clearly they need not in all cases: for example, in

some cases the reward may be too low to successfully encourage R&D, or firms may not perceive the

promise of a future reward to be credible. Given these types of concerns, it is helpful to look at the

historical record to ask whether past prizes have been successful in spurring innovation. Prior to two very

recent papers, such analyses were limited to a relatively small number of historical case studies. For

example, a frequently discussed case study is a 1714 prize offered by the British government for a method

of measuring longitude. While detailed analyses of such case studies (as provided by Sobel 1996 for the

case of this “Longitude” prize) are invaluable in highlighting potential pitfalls arising with prize

mechanisms, such case studies are unable to answer the question of whether prize mechanisms can be

systematically used to incentivize innovation. Two recent papers gather new datasets on prizes in order to

shed more systematic light on this question: Brunt, Lerner and Nicholas (2008) and Nicholas (2010).

Brunt, Lerner and Nicholas (2008) collect a novel dataset in order to analyze prizes awarded (for

“inventiveness”) by the Royal Agricultural Society of England (RASE) between 1839 and 1939. The

goal of RASE was to encourage scientists to apply their skills to improving agricultural technologies.

Starting in 1839, RASE held annual prize competitions. One year in advance of the competitions, RASE

announced which technological areas would be targeted as well as the number and value of prizes to be

awarded in each area; judges authorized payment of awards, or withheld them if the criteria for winning

were not met, and were also given discretion to award additional ex post prizes. These competitions

awarded substantial monetary prizes (in excess of £1 million in current prices) as well as prestigious but

non-pecuniary medals. Between 1839 and 1939, 15,032 inventions competed for these prizes and a total

of 1,986 awards were made.

In order to examine the question of whether these prizes encouraged innovation, the authors

assemble data on all applications for (and grants of) British patents from 1839 to 1939, matched to

information on competition entrants, prize winners, and prize “schedules” (that is, the pre-announced

targeted technological areas as well as the number and value of prizes). Following previous work, they

also collect information on whether renewal fees were paid for granted patents as a proxy for the quality

of patents (since inventors should be more willing to pay renewal fees for more valuable patents; see, e.g.

Schankerman and Pakes 1986).

Using this data, the authors present a number of empirical results. First, they find that the RASE

contests attracted large numbers of entrants. This is true for both pecuniary and non-pecuniary prizes,

with the largest entry effects arising from the non-pecuniary RASE gold medal. Second, they find that

prizes are associated with “real” changes in contemporaneous patenting activity in the technological areas

targeted by the RASE contests. This result suggests that RASE prizes were spurring not only the entry of

technologies into RASE contests, but actually spurring the development of new technologies (as

measured by patents) that would not otherwise have been developed. Importantly, the induced innovation

seems to be composed of “high quality” inventions as measured by the renewal fee metric described

above. Within the sample of “high quality” patents as defined by this measure, the authors find that a

doubling in monetary prize value is associated with a 4 percent increase in contemporaneous patents, and

that an additional medal is associated with a 20 to 21 percent increase in contemporaneous patents.

In a second recent paper, Nicholas (2010) examines a similar research question in the context of

Japan’s Meiji era – during which patents were introduced in Japan (in 1885) and a large number of mostly

non-pecuniary prizes were awarded (by 1911, 1.2 million prizes were awarded at 8,503 competitions).

Using a methodology similar in spirit to that in Brunt, Lerner, and Nicholas (2010), he finds evidence that

prizes increased patent outcomes on the order of 30 percent.

To summarize, both studies suggest prize awards – including non-pecuniary prize awards – can

encourage not only entry into prize contests, but also “real” innovation, as proxied by patenting activity.

While the results of these studies clearly do not imply that prizes will successfully spur innovation in all

cases, they are suggestive that the types of prizes that have been implemented in the past can be

successful on this metric.