Prizes generate multiplier effects – they spur far more private investment than what the prize is worth
Derek Khanna, 2015 - associate fellow of the R Street Institute. He previously was acting policy director for Lincoln Labs, a visiting fellow at Yale Law School’s Information Society Project, JD from Georgetown University Law Center. “USING PRIZES TO SPUR INNOVATION AND GOVERNMENT SAVINGS” R Street Policy Study No. 44, https://web.archive.org/web/20160304015157/https://www.rstreet.org/wp-content/uploads/2015/11/RSTREET44.pdf //DH
A third method to encourage innovation is the use of structured prizes. Under the prize model, government agencies, private organizations or a mix of the two, typically host a competition to achieve some specific breakthrough, with the winner promised a set reward. The prize model is notable for its ability to produce significant multiplier effects, as a relatively small prize can spark major investment by the private sector.
In practice, the prize model offers a uniquely level playing field. Newer teams frequently bring novel solutions that outpace participants with nominally more impressive credentials. While prizes are not as common as other incentives to innovations, the historical basis for the model is at least as old as that as for patents. Prizes sponsored both by the private sector and by the public sector each have proven effective in encouraging research and development. A 2009 McKinsey report found that philanthropic and private-sector investment in prizes has increased significantly in recent years, including $250 million in new prize money brought to bear between 2000 and 2007.17 The Wall Street Journal concluded that “prizes have proliferated because they actually work.”18