Prizes forces economic distortions and displace superior market inventions

There already is a government system for transferring technology in government labs to the private sector.27 This system would need to be expanded to accommodate technology generated by prize competitions. Such an expansion would require additional administrative costs, which would require additional tax revenues and economic distortions. Another concern with such large-scale administrative systems for government prizes and public technology transfers is that they are costly to dismantle, often taking on a life of their own. The effects on markets for inventions could be very difficult to reverse, causing long-term damage to markets for invention.28

A government prize system would diminish private incentives for commercialization of inventions. Kieff’s (2001) emphasizes the importance of markets in stimulating commercialization of inventions. Public ownership or common ownership of inventions would eliminate private incentives for the commercialization of inventions, as Kieff (2001) explains (see also Abramowicz, 2003). Common ownership of inventions also would diminish incentives for innovation to develop products, manufacturing processes, and transaction techniques based on those inventions. Additionally, common ownership would diminish marketing of products that embody inventions.

Some prize advocates of prizes view the discouragement of commercialization as an advantage of a prize system. For example, Love and Hubbard (2007, p. 1554) assert that marketing products is a “waste,”

The elimination of marketing monopolies, the de-coupling of R&D incentives from prices, and the creation of an evidence-based reward system linked to changes in health outcomes will lead to significant reductions in expenditures to market products, the area of the largest waste in the current system.

Contrary to this assertion, marketing and sales are important coordination mechanisms in a market economy.

Government agencies would replace decentralized markets with centralized allocation. Government agencies are not well equipped to run market places. Health insurance exchanges are an example of government market place design.29 Government allocation of goods and services often entails high administrative costs, significant transaction costs, and allocative inefficiencies.30 Historical evidence suggests that state and federal regulation led to considerable allocative and dynamic inefficiencies in markets for electric power, natural gas, telecommunications, railroads, trucking, and airlines.31 Increased regulation in health care can be expected to generate similar allocative and dynamic inefficiencies.32

Government prizes for inventors would fail to fulfill the functions of IP in product markets. Markets determine the value of goods and services through interaction of supply and demand, and the same applies to inventions. John Stuart Mill (1848, p. 932) explains this clearly: “the reward conferred by it depends upon the invention’s being found useful, and the greater the usefulness, the greater the reward; and because it is paid by the very persons to whom the service is rendered, the consumers of the commodity.”33

A prize system without property rights for inventors would eliminate the allocative and dynamic efficiencies of the market for inventions. Inventors would lose innovative control over their inventions, thus eliminating incentives to allocate inventions to the highest-value uses. Lack of innovative control would eliminate incentives to continually develop inventions, to commercialize inventions, to introduce innovations based on inventions and to invest in complementary assets.

The prize system lacks all of the key features of the patent system – exclusion, transferability, disclosure, certification, standardization, and divisibility. Without these fundamental elements a market for inventions would be highly constrained and less efficient. Demsetz (1969) identifies IP rights as critical for reducing transaction costs in markets for invention. Epstein (2010) emphasizes the importance of IP property rights in disseminating protected information.

Replacing patents with prizes would be analogous to replacing corporate securities with prizes for investors. Such investment prizes would not finance corporations because they would provide neither return of principle nor return on principle. Invention prizes would not stimulate invention and innovation because they would not provide economic returns for inventors, innovators or investors in complementary assets. Just as investment prizes could not replace financial markets, so invention prizes cannot replace the market for inventions.

Prize systems generally involve either public ownership or common ownership of inventions. With public ownership, the government would presumably make the inventions available to producers without cost, so that the outcome would be the same as with common ownership. With public ownership of inventions, government officials would need to invest in commercializing inventions or developing innovations that apply the prize-winning inventions. This would involve public expenditures for the costs of commercialization and innovation, effectively putting public agencies in the innovation business. Involving public agencies in commercialization and innovation would require public agencies to develop business expertise that is already available in the private sector.

Public commercialization and innovation would generate insurmountable problems of economic planning. Exercising command and control over economic activity has led to significant problems in socialist economies. The collapse of socialist economies such as the Soviet Union provides sufficient evidence that even the operation of traditional technologies by governments is not feasible. The diffusion of new technologies and management of innovation generally are beyond the scope of government administration.

Governments are not very good at commercializing and diffusing inventions. The failure of government diffusion of technology is illustrated by the major benefits that resulted from the Bayh-Dole Act. The Bayh-Dole Act illustrates how markets diffuse innovations and governments do not. The U.S. government provides research grants to universities, non-profit organizations, and small businesses. However, the incentives for invention provided by such grants are accompanied by markets for invention, which provide additional incentives for commercialization and innovation. This was recognized by the Bayh-Dole Act, which permits organizations that receive federal government funding to own inventions rather than transferring ownership to the government.34

Prior to the Bayh-Dole Act, government ownership of inventions resulted in minimal commercialization or diffusion of innovations. About 5% of the 28,000 patents owned by the government were commercialized, and private ownership in contrast generated significant commercializing of inventions though patent licensing by universities.35 In the first 25 years following the Act, university patent licensing generated 4,350 new products and 6,000 new firms (Bayh et al., 2009, p. 3). The Bayh-Dole Act resulted in high levels of entrepreneurship by scientists and spurred the rise of university technology transfer offices (TTOs) (see Aldridge and Audretsch, 2011, and the references therein).36 According to the Association of University Technology Managers reports that there were about 40,000 active technology licenses and options in 2012 (AUTM, 2013).

Government subsidies are not close substitutes for market incentives for innovation. The National Science Board (2014) estimates that federal agencies provided over $132 billion for R&D. Wright et al. (2014, p. 298) find that even though corporations provide just over 5% of US university research funding, “corporate-sponsored research is surprisingly valuable for further innovation. Data collected over 20 years at nine campuses and three national laboratories administered by the University of California show that corporate-sponsored inventions are licensed and cited more often than federally sponsored ones.”