Prizes can incentivize more innovation

Prizes have long been used to induce solutions to national challenges. Between the 16th and 19th centuries, prizes yielded the vaccine inoculation, the lifeboat, a method of calculating longitude at sea, new food-preservation techniques, and more. But by the late 19th century, prizes had largely been replaced by two other mechanisms: patents and grants. However, those tools have limitations. Patents lead to innovation only in areas where inventions have commercial potential; and given the structure of government funding, grants are awarded to a narrow range of eligible recipients.

As a result, prizes have been making a comeback. “Prizes are an incentive mechanism that is particularly interesting when you want to specify the kinds of innovations you’re looking for and when you want to diversify the base of potential innovators,” says Fiona Murray, the David Sarnoff Professor of Technological Innovation, Entrepreneurship, and Strategic Management in the MIT Sloan School of Management. Accordingly, in early 2011, the Obama administration established regulations explicitly designed to accelerate the adoption of “ambitious prizes in areas of national priority.”

For Murray, the growing emphasis on prizes as a policy tool raises questions: What sorts of prizes work and for what; and how should prizes be structured to elicit innovation relating to the particular problems we care about? Current literature on the topic includes extensive anecdotal evidence and a “fairly significant body of economic theory that creates models of how prizes should work,” Murray says. But there is little formal analysis of empirical evidence from actual prizes — especially big prizes — and how they function “on the ground.”

To fill that gap, she set out to perform a systematic study of an ongoing “Grand Innovation Prize.” Her goals were to gather insight into how a prize works in practice, and then compare that empirical evidence to the ideas of the economists who study prizes and the advocates and policymakers who design them. Seeing how those perceptions differ could help lead to the more effective use of prizes to stimulate innovation in areas where patents and grants may fail.