Empirically worse than patents – uncertainty, lower benefits, and less diffusion of innovations

Historical evidence casts doubt on prizes systems as sources of invention and innovation. According to Khan (2014a) “the historical record shows that administered prize systems tend to be associated with the potential for bias or corruption, unpredictable methods of allocation and outcomes, as well as other deficiencies attendant on a nonmarket orientation.” Khan (2011) studies inventors in Britain and the U.S. during the transition from the First to the Second Industrial Revolutions and finds that because prizes are less systematic than patents, they offer lower expected benefits for inventors. Khan (2013a) considers a sample of exhibits and premiums at U.S. industrial fairs between 1837 and 1874 and finds that prize winners tended to belong to privileged social groups, with prizes awarded less systematically than patents and unrelated to various proxies for the productivity of the innovation.37

Khan (2014c) provides a critically important historical comparison of the effects of patents and prizes on technology diffusion. She compares patented inventions with inventions that were submitted for prizes at annual industrial fairs of the American Institute of New York in the 19th century. Khan finds that patents promote much greater spatial diffusion of innovations than prizes. Additionally, Khan’s research shows that patents had large and significant effects on unpatented innovations in contiguous and adjacent counties, in contrast to limited geographic effects of prize-winning inventions.