Grants are superior to patents – they can leverage innovations where the social value exceeds the market value

Part IV describes the rich tools the grant system supplies to policymakers, focusing on grants' two key comparative advantages. First, grants can support innovations whose social value exceeds their appropriable market value. This describes basic research; because later applications of basic research are variable and unpredictable, it has substantial spillovers (positive knowledge externalities), and is undersupplied by private firms relative to its social benefit. 25 Private firms also generate inadequate information about which basic research is worth funding. But a panel of experienced peer reviewers, [*9] combined with disclosures from grant-seeking researchers, may be able to make precisely that determination. At a broader level, the market systematically undervalues some forms of innovation because market demand does not reflect social welfare value. A powerful example is innovation targeting diseases of the poor; because the poor often cannot pay for drugs, market signals do not reflect the social welfare benefits of developing those drugs. The grant system's reliance on non-price signals brings risks of inefficiency or cronyism, but its incorporation of non-market information also allows different, useful allocation of funds beyond what markets would pick.

Second, grants can directly support innovation enablers - the people, institutions, processes, and infrastructural resources involved in innovation - in a way largely unavailable to other forms of directed innovation incentives, especially patents and prizes. Basic research serves this role when it provides the grounding for later research, but it is only one example. Grants can develop human capital by providing training or otherwise enabling the research of young scientists who will have longer careers ahead of them. Grants can also target the processes or institutions of innovation by providing resources specifically for interdisciplinary research (to build collaborations and boundary-crossing networks) or for institutions (to provide physical or other resources for collections of individuals). Finally, they can support infrastructure, including datasets that enable future innovation, such as the Precision Medicine Initiative's All of Us dataset or the Human Genome Project (both NIH-funded).