Looting deficit - prizes are corrupted by rent-seeking behavior – that reduces innovation

Prize advocates assume that central planners are fully informed about market demand and producer costs. Central planners would need to have sufficient knowledge about science and technology to design contests and to choose the best inventions. Central planners must be sufficiently informed to allocate inventions efficiently to producers. The complexities of invention and innovation create significant information challenges for market participants; such challenges are likely to be insurmountable for central planners. The dramatic differences in the historical performance of market economies and centrally-planned economies are even more pronounced in innovative industries.

Problems with central planning extend beyond asymmetry of knowledge. Prize advocates assume that governments maximize social welfare. Even if they could be fully informed, central planners need not act in the public interest. Central planners can be expected to suffer from corruption, abuse of power, discrimination, bureaucratic inefficiency, and other forms of government failure. Government agencies are likely to provide rewards to cronies of politicians, lobbying organizations, incumbent firms, political donors, voting blocs, or ideological allies. A government prize system would encourage rent seeking to obtain prizes, diverting resources away from invention and innovation and toward political influence. Government agencies also are likely to pursue objectives other than allocative efficiency, such as subsidies for groups of voters, increases in employment, income redistribution, regional economic growth, industrial policy, and support for political causes.

Although necessarily imperfect, the patent system is less subject to corruption than a public prize system. With patents, the government establishes general rules of the game through a system of private property rights. The patent system involves the legislature, , the courts, and the USPTO, which is part of the executive branch. The market for inventions determines prices for inventions and selects the best inventions and innovations. In contrast, with a system of prizes, the government micromanages innovation: it designs the contests, chooses prizes, selects inventions, and allocates technology.