Prizes create fears of expropriation – that deters investment in R&D

The most pressing political economy concern with the prize system is the risk of inadequate prize payouts and expropriation. When innovators earn their profits through a government-funded prize system, they are competing against other interest groups over scarce taxpayer dollars. Innovators are likely to be at a disadvantage in these types of political battles for three reasons. First, by nature, innovators often threaten established interests and therefore create opposition from more powerful interest groups.286 Second, because innovators capture an unusually small portion of the social surplus generated by their activities,287 they have proportionally fewer resources to devote to rent seeking in support of their R & D investments. Third, and most importantly, innovators are particularly vulnerable to expropriation under a prize system because the government determines their prize payout after innovators have invested in R & D and disclosed their inventions to the government. Since innovators’ R & D investments are sunk at this stage, the government can take advantage of its position to grossly underpay innovators,288 who may have little choice but to accept the insufficient reward.289 Legislators could then redirect funds that would otherwise incentivize innovation toward lower taxes or other government spending programs, many of which would offer more immediate political gains than payments to innovators meant to encourage R & D spending.290 Eventually, the public would suffer from the reduced output of socially valuable innovation. However, this malfeasance would be largely hidden from voters, since it is nearly impossible to observe the relative absence of new innovations.291 Consequently, the risk of expropriation in a prize system could be a significant deterrent to private-sector investment in R & D unless there are political checks to prevent underpayment.