[Ip-health] KEI issues report on Selected Innovation Prizes and Reward Programs

[James Love]

KEI issues report on Selected Innovation Prizes and Reward Programs

On March 20, 2008, KEI published "Selected Innovation Prizes and Reward
Programs" (cite as KEI Research Note 2008:1).  The paper, which is
available on the Internet here:
http://www.keionline.org/misc-docs/research_notes/kei_rn_2008_1.pdf,
provides the most comprehensive account of historical uses of prizes to
induce innovation now available.  The introduction to the 51 page report
follows:

Introduction

This is a survey of innovation prizes and reward programs that have been
implemented with the primary purpose of stimulating innovation.  The
purpose of the survey is to provide background and context for those who
are considering prizes to stimulate innovation.

In recent years, there has been a growing interest in new ways of
rewarding innovation.  The themes and rationales for various prize
efforts differ considerably from area to area.  In some cases, prizes
are seen as a way for =E2=80=9Ccrowdsourcing=E2=80=9D research and developm=
ent =E2=80=93
reaching out beyond closed communities of employees and contractors or
grant recipients.   Prizes are also sometimes proposed as an alternative
to intellectual property-enforced monopolies, in order to enhance
access.  But in other cases, prizes simply supplement other, more
traditional subsidies and incentives.  Governments, philanthropists,
businesses and others considering the use of prizes are interested in
learning more about the way they have been implemented by others.  This
research note provides a number of data points to support such
investigation.

We have largely, but not exclusively, focused on ex ante prizes that
specify, in advance, a desired outcome and a reward for obtaining it in
order to incentivize innovation, rather than ex post prizes that honor
or reward achievements after the fact.  However, the distinctions are
not black and white.  For example, in some cases, prizes are announced
as rewards for achievements in a particular area, such as to promote
sustainable energy, but the criteria for winning are not very specific.
Such prizes likely stimulate innovation, but they are not as relevant to
this survey as prizes that are more clearly obtainable if one performs
in less ambiguous ways.  We include many different types of innovation
prizes, but the survey is weighted toward examples that are more
specific regarding the outcomes that are rewarded.

Prizes are grouped by subject matter, and then listed chronologically
from earliest to latest as determined by the year in which the prize was
initially offered.  In addition to the many prize competitions that were
actually implemented, several are included that were proposed by
legislators or political candidates or parties that so far have not been
implemented.

The prizes included in this survey were chosen for a variety of reasons.
Some are prominent, and others are not.  The list of prizes is not
exhaustive and is more complete in some fields than in others. Taken
together, the examples are intended to illustrate the possibilities that
prizes offer.  As is evident from the examples, there is considerable
diversity in the purposes, designs, management structures and
performance of various innovation prizes.  Some prizes have been very
successful, while others have been mired in controversy, or did not
induce the desired result.  The amount of the prizes varies
considerably, from $2.56 (the Knuth Reward Checks) to a proposed prize
fund of more than $80 billion per year (S.2210, 110th Congress, the
Medical Innovation Prize Fund of 2007).

The literature on innovation prizes is surprisingly incomplete, but one
does find extensive references to the use of prizes to stimulate
innovation in the 18th and 19th centuries, for a wide range of purposes,
only a handful of which are reported here.  Enthusiasm for the use of
prizes seemed to wane in the late 19th century and in the 20th century,
only to see a new and still-expanding interest in the early 21st
century.

Cash prizes are only one of many different ways to stimulate innovation.
Grants and other up-front research subsidies and the prospect of
marketing monopolies enforced by patents and other intellectual property
rules are also important mechanisms.

The relationship between prizes, intellectual property rights, and
grants varies considerably in the examples reported here.  In many
cases, prizes have been proposed as an additional incentive that would
supplement the rewards from exclusive rights associated with patents.
In other cases, the prizes are designed as a substitute for, or an
alternative to, a patent-enforced monopoly.  In the 20th century,
government research institutions in France, Germany, the UK and
elsewhere largely replaced prizes with systems of grants, and courts
have allowed privately endowed prizes to be converted to grant programs.

The advantages of grants and temporary patent-enforced monopolies as
mechanisms for financing research into innovation are many.  It is often
difficult to measure or pre-specify useful outcomes from research, and a
system that only relies upon performance, such as prizes, can fail to
provide the type of sustainable support  that is needed for systems of
science and innovation, and low expected probabilities of success may
unduly discourage effort or investment, factors that have certainly
contributed to the rise of a grants economy.

The traditional patent system provides opportunities for inventors and
entrepreneur to identify useful innovations that have commercial value,
outside of the supervision of a tradition-bound and cautious
bureaucracy, and the market-driven valuation of patented inventions
creates enormous incentives for investment in the development and
commercialization of new products and services.  In terms of resources,
grants and the prospect of temporary monopolies have generated enormous
resources for research and development activities, far more than the
level of funding now available for prizes.

Prizes, however, offer certain important advantages over grants or
temporary monopolies.  When designed well, prizes can reach a wider
community of problem solvers than will grants and, like the prospect of
a commercial monopoly, bring in new actors following unconventional
approaches, and stimulate private decision-making and entrepreneurship.
Prizes can be used when the desired output is not patentable, or the use
of the patent system is too costly and bureaucratic, or when the private
market for the outcome is inadequate or does not exist.  If prizes are
used as an alternative to a monopoly as the incentive for private
investment, it is possible to avoid a wide range of costs associated
with monopolies, including not only high prices and barriers for access
to the inventions, but also obstacles to follow-on innovation.  Prizes
can also be tailored as incentives in ways that are simply not possible
with rewards that are tied to the monopoly prices of the outputs.  Some
of the areas where prizes are thought to have important advantages are
cases where it socially and economically important to have marginal cost
pricing and/or free access to the outputs of the R&D efforts, or where
it is important to reward the development of translational and
transition technologies and products that will not by themselves be
commercially viable, but which serve to advance the state of the useful
arts and sciences.

All systems to finance innovation have shortcomings.  The challenges
associated with the use of prizes are several, including difficulty in
specifying and measuring the outcomes to be rewarded, and the financing
of the rewards.

The majority of the prizes discussed below are sui generis in nature,
focusing on specific problems to be addressed, and outside of specific
prize endowments, without a sustainable system of finance.  For example,
all of the new prizes in the areas of transportation, power, and climate
change follow this traditional approach of sui generis specification of
rewarded outcomes and intellectual property rules, and episodic funding.

In the minority, but of interest, are the more ambitious efforts to use
prizes as a systematic mechanism to reward innovation, with sustainable
systems of finance.  The often disparaged Soviet Union system of
rewarding innovation with =E2=80=9CAuthorship Certificates=E2=80=9D achieve=
d sustainable
finance by tying prize rewards to a fraction of savings achieved by
innovations.  While the now discontinued Soviet approach did achieve
successes in some areas, it operated in an economy where inventors had
to rely upon the State to provide the planning, capital, energy and risk
necessary to exploit the inventions, which was a severe shortcoming.  An
older experiment was the system used in Lyon, France in the 18th Century
to reward innovations in the textile industry.  Lasting many decades,
and financed both through a tax on silk imports and contributions from
members of the Grand Fabrique textile guild, the Lyon system is
considered by many to be a powerful and successful example of the use of
prizes to stimulate both innovation and the diffusion and use of the
innovations, in a system where invention was considered a public good.
The Lyon system also explicitly rewarded technology transfer and
sequential innovation.  More recently, the proposed U.S. Medical
Innovation Prize Fund would reward private drug developers who are
successful at registering new medicines that improve healthcare outcomes
with enormous levels of sustainable funding tied to annual GNP levels,
completely eliminating the need for monopolies on new medicines.

No program to stimulate innovation guarantees success. The prize
competitions discussed below sometimes succeeded impressively, but not
always.  Failures are not unique to prizes.  For example, despite
billions of dollars in grants from the National Institutes of Health and
other donors and the existence of strong exclusive rights for patents,
there is a paucity of progress for the treatment of Alzheimer=E2=80=99s dis=
ease.
Similarly, there has been almost no significant innovation in terms of
tuberculosis testing for more than a century.  The administration of
some prizes were fraught with difficulty, but so are some grant
programs, and patent systems are subject to a plethora of well-known
shortcomings.  Each instrument has strengths and weaknesses, and the
results will vary.

Today many philanthropists, businesses and governments are looking to
prizes as an incentive mechanism that can complement or compete with
grants or marketing monopolies.  The context is very important, as the
goals and problems that motivate the creation of the prizes vary
considerably.  At a minimum, prizes can extend the community of actors
working to solve innovation challenges beyond those who would be
supported by grant programs.  Prizes can also be used to overcome access
problems otherwise caused by monopolies, or to stimulate innovation in
areas where patents are irrelevant or ineffective.  But prizes may also
be used in combination with grants and/or marketing monopolies.  Prizes
are, however, increasingly becoming part of the policy framework for
stimulating innovation, and play an important role in shaping our
knowledge ecology.

Suggestions for additions or corrections to this survey, which may be
updated again, should be sent to prizes@keionline.org.This e-mail
address is being protected from spam bots, you need JavaScript enabled
to view it

   The 51 page report is available here:
http://www.keionline.org/misc-docs/research_notes/kei_rn_2008_1.pdf


--
_____________________________
James Love, Knowledge Ecology International (KEI)
http://www.keionline.org, mailto:james.love@keionline.org
voice +1.202.332.2670, fax +1.202.332.2673, US mobile +1.202.361.3040, Gene=
va mobile +41.76.413.6584

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