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Nous vivons dans une société très hétérogène, où les entreprises se livrent à une bataille concurrentielle de chaque instant, et où les politiques fiscales et sociales appliquées à celles-ci varient selon les pays. Plus que jamais, la nécessité de se démarquer et d’innover pour capter des parts de marché doit motiver les entreprises à devenir plus compétitives. Mais comment ? À quel prix, et avec quel financement ?
Les prix semblent surmonter les limites liées au risque moral de la recherche contractée et à la perte monopolistique imputée à l’exclusivité d’un brevet, mais sont-ils pour autant les garants d’une société où l’innovation serait pérenne ? La réponse est non, évidemment.
Le levier principal par lequel doit progresser le progrès technique et l’innovation reste la R&D. Mais celle-ci – en raison de contraction budgétaire – n’est pas suffisamment soutenue par le gouvernement. Les moyens fournis aux laboratoires de recherche et aux institutions n’ont pas vraiment progressé ces dernières années, contrairement à certains de nos voisins européens.
Entre 1996 et 2015, la part de la R&D dans le PIB de la moyenne de la zone euro à progresser d’environ 23%. Sur la même période, celle de l’Allemagne (dont le segment industriel est situé sur le haut de gamme) a augmenté de presque 35%. La part de la France, elle, continue de stagner autour de 2%, mais est en baisse de 3% par rapport aux vingt dernières années. La première solution consisterait à réduire les dépenses publiques générales (lesquelles sont pléthoriques à 57% du PIB) pour dégager de l’investissement supplémentaire. Mais cela relève d’une problématique politique plutôt complexe…
Pour l’heure, il faut continuer d’allouer de manière efficace les flux de financement actuels – aussi limités soient-ils – vers les secteurs à forte valeur ajouté ou couvrant un vaste marché : l’Industrie Automobile, pharmaceutique, aéronautique et spatiale, composants électroniques et informatiques, etc.
Le soutien aux entreprises doit néanmoins demeurer central. Même si les résultats du CICE en termes d’embauches se sont révélés peu encourageants, celui-ci a permis aux entreprises de restaurer leurs marges ces trois dernières années et de dégager des possibilités d’investissement. On trouve également la politique de sur-amortissement fiscal débutée en 2015, et consistant en une économie d’impôt sur l’acquisition de nouveaux équipements jusqu’à 40% de leur prix de revient. Ce dispositif gagnerait à être reconduit puis modélisé sur la recherche afin de stimuler les facteurs productifs liés à l’innovation.
Autre instrument qui a été sollicité par les entreprises ces dernières années : la prime d’innovation. En plus de récompenser le personnel compétent pour leurs initiatives, cette prime est une rémunération idéale pour l’innovateur lui-même. Elle permet de rétribuer – par le biais de traitements avantageux – les efforts innovants à la hauteur de la valeur ajoutée apportée à l’entreprise. Je trouve cette mesure particulièrement incitative à l’innovation, car elle ne comporte que des avantages, aussi bien pour le personnel récompensé que pour l’employeur qui verse une prime exonérée de cotisations sociales et exclue de la marge salariale.
Néanmoins, ces outils d’incitation ne résolvent pas les questions soulevées précédemment, en particulier celle de la détermination du montant initial versé aux entreprises pour l’élaboration des projets. Il faut réussir à trouver un compromis entre un prix trop faible pour stimuler efficacement l’investissement en R&D et un prix trop élevé qui pourrait entraîner des doubles emplois. De même, il convient de savoir distinguer le financement, l’initiative et la recherche à proprement parler. Une entreprise peut manquer de capitaux pour entreprendre ses recherches, celles-ci pouvant être jugées trop risquées pour amener des banques à leur avancer des fonds : l’entreprise doit donc surmonter cette aversion au risque en présentant des garanties suffisantes.
Mais présenter un projet fiable, abouti et finement élaboré n’est pas suffisant au soutien à l’innovation. Aujourd’hui, une vision à court terme du développement organisationnel et de la chaîne de production domine les motivations premières des entrepreneurs : au lieu d’investir dans ce qu’on appelle des « innovations de rupture », ils investissent dans des innovations de « continuité », qui impliquent des procédés nouveaux de fabrication de produits déjà existants. On améliore les rendements à partir d’une performance technologique améliorée, mais déjà présente. Il ne s’agit pas d’une innovation révolutionnaire, on ne crée pas de marché. L’Etat pourrait donc focaliser ses moyens restreints en récompensant l’innovation réelle.
Les prix ont également un autre défi, celui de s’adapter au type de recherche concerné. Les dépenses en recherche-développement sur la mise au point d’inventions relatives à des logiciels ne sont pas les mêmes que celles consacrées à d’autres domaines technologique. Chaque domaine retient un effort plus conséquent à fournir qu’un autre. Des années de recherche sont nécessaires au développement de traitements médicaux, à la commercialisation de systèmes de sécurité pour véhicules intelligents (ou robots chirurgicaux) et à ceux destinés à améliorer le rendement énergétique par exemple.
En fin de compte, le lien qui unit les prix et l’innovation découle d’une nécessité de ciblage autour des moyens de financement… Les dépenses doivent être allouées de façon optimale, et les récompenses doivent être suffisantes pour encourager l’initiative.
Sources :
(1) Magazine Alternatives Economiques n°367 Avril 2017
(2) http://www.ucm.be/Actualites/Prime-unique-d-innovation-reconduction-pour-2015-et-2016
(3) http://www.lemonde.fr/economie/article/2014/01/27/l-etat-conserve-un-role-majeur-dans-l-innovation_4355358_3234.html
(4) https://fr.wikipedia.org/wiki/Technologie_de_rupture
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Le retour en force de récompenses pour l’accomplissement de recherches dans un domaine précis peut-il aujourd’hui faire sens ?
Depuis l’avènement du paradigme libéral au XIXème siècle, la doxa économique veut que l’innovation soit induite par le marché lui-même et participe au cercle vertueux de création de richesses. Les thèses de Schumpeter dans sa Théorie de l’innovation économique formalisent cette vision entre innovation et capitalisme.
Cependant, après des décennies de croissance soutenue, l’innovation par le marché semble au début du XXIème siècle ne plus tenir toutes ses promesses. En effet, dans certaines branches, des entreprises ou groupement d’entreprises maintiennent une position oligopolistique sur certains marché (automobile, médicaments, énergie, …). Dès lors leur capacité innovative va souvent être conditionnée par la prolongation de leurs intérêts économiques, et vont se prévaloir d’un potentiel risque de bouleversement de leur secteurs respectifs, synonyme d’une baisse potentielle de leur part de marché.
A cette situation s’ajoute de nouvelles prises de conscience de problèmes-ou futurs problèmes- à forte dimension sociétale comme le réchauffement climatique et/ou la raréfaction des ressources primaires. Aux rigidités précédemment citées peut donc s’ajouter un contexte d’urgence,et s’en remettre en marché pour innover sur ces questions ne semble donc pas être une solution adéquate face à l’urgence de ces nouveaux enjeux.
La remise de récompenses pécuniaire semble donc être une solution viable pour stimuler la recherche dans des marchés délaissés ou trop immatures pour constituer un réel intérêt économique. La plupart de ces récompenses sont d’ailleurs proposées par des acteurs publics ou non-commerciaux (institutions nationales, ONG, instituts, …).
Néanmoins, si la recette fonctionnait par le passé, cette incitation à l’innovation semble aujourd’hui plus difficile à mettre en oeuvre. En effet, innover dans des domaines de pointe comme le moteur à hydrogène génère des coûts en recherche et développement de grande ampleur et difficile à estimer, que de telles récompenses attribués “au lance pierre” pourraient ne pas rentabiliser.
De plus, dans ce système on va être confronté à une compétition entre différent acteurs désireux de décrocher le prix alors que ces derniers pourraient augmenter leur efficience en coopérant. A l’inverse, certains acteurs potentiellement capables pourraient ne pas se lancer dans la course par peur d’être supplantés par des concurrents avant d’arriver au terme de leur recherche.
Pour conclure, cette incitation semble bien moins avantageuse qu’un brevet et ne pourra pas s’inscrire, à mon avis, comme un modèle pérenne de production d’innovations. Une alternative plus durable serait celle du subventionnement (développé dans d’autres commentaires) , mais là encore des limites peuvent apparaître comme le détournement de ces subventions à des fins comptable avec l’exemple du CICE en France (1), ces dernières étant remise sans garantie de résultats.
Sitographie:
http://www.liberation.fr/futurs/2016/03/10/automobile-hydrogene-le-cout-de-l-envie_1438830
Concorde Coordinating Committee. « Concorde : MRC/ANRS randomised double-blind controlled trial of immediate and deferred zidovudine in symptom-free HIV infection » Lancet 1994 ; 343:871-81.
http://oeconomia.net/private/cours/economieentreprise/themes/innovation.pdf
(1)
https://www.humanite.fr/le-contribuable-finance-les-licenciements-556200
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Les prix sont une grande source de motivation pour les innovateurs car ça leur permet de produire à moindre coût.
Cependant des problèmes subsistent dans l’obtention de ces prix.
Le gouvernement peut donner un prix si l’invention fonctionne, cela permet à l’innovateur de faire face à ses coûts initiaux, c’est une sorte de récompense mais en revanche si l’innovation ne fonctionne pas le prix peut ne pas être décerné à l’innovateur. Il faut donc qu’il avance ses recherches avec son capital propre sans avoir la certitude que son innovation lui permettra d’acquérir son prix. Il faut que l’innovation atteigne les objectifs pour lesquels le prix a été créé. Les brevets, recherches contractées ou R&D peuvent obtenir un prix pour les mêmes raisons. Néanmoins, en ce qui concerne la R&D, si ces activités sont trop coûteuses, le prix peut subvenir à des dépenses initiales sans les couvrir entièrement.
Un autre problème peut survenir, c’est celui de la concurrence. On y pense pas vraiment car on cherche à avoir le prix, mais il faut tenir compte des concurrents qui cherchent la même chose, les innovateurs se battent pour un même prix. Ils font donc aussi en fonction des autres pour que leur innovation soit la meilleure dans leur domaine tout en gardant un rapport de prix compétitif.
Dans certaines innovations d’une certaine complexité, il est possible que l’innovation repose sur le prix car c’est celui-ci qui donne la possibilité ou non de tester l’innovation. L’autorité de délivrance du prix peut avoir du retard ou conclure qu’il n’y a pas de gagnant.
le dernier problème par rapport à ces prix c’est celui des compressions budgétaires fait par l’état par exemple, n’encourage pas forcément l’innovation en raison de l’incapacité potentielle du gouvernement de payer le montant des prix.
D’autres types de prix peuvent rentrer en ligne de compte:
En particulier les aides aux projets d’entrepreneurs en R&D ou Innovation, ces aides financent jusqu’à 60% du budget éligible du futur projet.
L’aide au passage d’un projet R&D à une production industrielle, c’est un prêt pour l’innovation de 7 ans étant compris entre 30 000 et 1,5 millions d’euros à un taux 0%.
Ou il y a encore le préfinancement de 80% du CIR prévisionnel de l’année N. Pour obtenir ce préfinancement il faut déjà faire partie de la CIR et posséder 2 exercices comptables complets.
D’autres aides sont aussi disponibles notamment pour les jeunes entrepreneurs tant au niveau national qu’au niveau territoriale pour promouvoir la création dans le pays par les jeunes.
Plusieurs sortes d’aides existent en fonction du secteur économique dans lequel l’activité est exercée, par exemple on a l’aide à l’investissement matériel, l’aide à l’investissement immobilier et l’aide à l’emploi et la formation du personnel.
sources :
-http://www.invest-innove.com/2016/01/28/panorama-des-aides-publiques-pour-linnovation/
-http://www.sogedev.com/bpi-france.php?gclid=CP-c6LvsptYCFUu3Gwod-jkOsw
-http://www.mckinsey.com/insights/innovation/using_prizes_to_spur_innovation
Vous avez raison de mentionner les aides à l’investissement en R&D comme mécanisme visant à motiver l’innovation.
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Should governments, autorithies and businesses issued more prizes to induce innovation ? In this comment, we will discuss the pros and the cons of prizes.
The Longitude Prize (1714), the Orteig Prize…. the list of prizes through time can be very long and extensive. It’s important to precise that orizes can take, among others, the form of Inducement Prize Contests and Recognition prizes (for example : Nobel Prize).
Nowadays, the use of prizes by governments, philantropies and private businesses is booming. Even though that sort of rewarding is not new, its role is changing decade after decade as pointed out in a McKinsey ‘s report of 2009 : since the nineties most of the prizes « have been designed to provide incentives for specific innovations rather than to reward excellence in general. ».
From the one hand, prizes can be very efficient in specific domains. Due to the fact that current sponsors are mostly businesses and benefactors, we can notice an increase of prizes in areas such as sience, engineering, aviation, space, and the environment to the detriment of the arts and humanities. A key success factor of prizes in those domains is that competitions lead to new industries through the fact that they inspire multiple solutions by setting a specific target without a particular way of achieving it.
Some authors have even though suggested that prizes could be sometimes an alternative to patents. One of the main reason of this idea is that some experts found that patent fail to provide incentives for innovations which are not commercially marketable. It’s the reason why prize would be an answer to that lack of incentive in, for example, the medical sector by the fact that that sort of award offers a fixed amount appropriate for reimbursing researchs.
This reflection has resulted to something more concrete in the United States through, for example, the action of Bernie Sanders. Most of the people agree that prizes are a great way of spur innovation in social sectors.
Researchers have highlighted three principal conditions so that prizes are effective : (1) a clear objective (measurable and achievable), (2) the availability of a wide population of potential problem solvers, and (3) a willingness on the part of participants to bear some of the costs and risks.
On the other hand, prizes are not always the best way to spur innovation. McKinsey consultants have conclude that if one or more of these conditions can’t be met, potential prize givers should consider alternatives such as grants or a combination of prizes and other instruments. For example, if goals are too high, it’s difficult to creat something audacious AND achievable.
Some proponents argue also that sometimes the amount of money is too high in comparaison of the problem the innovation solves. Furthemore, experts recognize that it can be a way of creating incentives to innovoation but not always «incentives to drive continuous cycle of advances and improvements because prizes are finite and limited”.
To conclude, prizes have positive and negative sides. It’s however clear that it’s mostly positive for corporations to use this method internally and on a smaller scale to spur out-of-the box thinking.
https://www.uschamberfoundation.org/sites/default/files/article/foundation/Power%20of%20Prizes_0.pdf
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Recently, the use of prizes for spurring innovation is increasing, mainly in areas considered to be socially and economically important. However, the aim is changing. Today, we promote specific innovations and give way the recognition of excellence, as we use to do in the past. In fact, the goal is to come up with solution to unsolved challenges that matter to citizens, like environmental and societal problems (and, by contrast, fields as the arts are far less popular). One example among many others is the introduction, by the European Commission, of a set of challenges prizes under Horizon 2020, the EU’s research and innovation programme. Moreover, companies are also increasingly turning to contests, and therefore prizes, to generate innovation instead of producing in-house solutions to problems. But why such an enthusiasm around prizes? It is the power of the diversity.
The wonderful thing about the prizes is that they can attract very diversify and nontraditional participants. Each of them being attract by different incentives. It is a really big advantage because it is almost impossible “to predict who will have the best ideas, or what combination of skills will best solve a problem”.
Furthermore, this wide range of problems solvers are also diverse motivations. It can be obviously the financial incentive but, in the most of cases, the reasons are totally different: “the thrill of competing, the love of a hobby or pastime, the passion for a particular cause and the reputational effects from participating and performing well”
Finally, prizes are creating a third form of diversity, the organizational one. In traditional R&D teams, people are designed to meet the predefined goals and are bound by the usual approaches to solve a problem. It is all the opposite in competitions. There is no rule, people are not constrained by rigid norms. They can create the solution to the challenge that they want. Under these circumstances, we often obtain solutions that “would not ordinarily develop through traditional routes such as grants or procurement”.
To conclude, the combination of these 3 diversification increase both the number and diversity of the proposed solutions.
However, before to set up prizes, it’s important to think the way we will do that. Three conditions are required to make them successful: “a clear objective, the availability of a relatively large population of potential problem solvers, and a willingness on the part of participants to bear some of the costs and risks”. If it is not possible to reach all of them, it will be more advised to consider another solution, such as grant.
The last point will be a recommendation for all the organizations that would set up prizes in the future. Don’t neglect their impact, quantify them and make appropriate changes in response.
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/using-prizes-to-spur-innovation
http://sloanreview.mit.edu/article/spurring-innovation-through-competitions/
https://ec.europa.eu/research/horizonprize/index.cfm
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Before diving into the comparison between prize inducement innovation and patents and contracted research, we first need to look into the prize based innovation mechanism and check if it really overcomes any of the drawbacks or defines some limitations of its own!
When there is a competition for solving a problem and winning a prize, two major issues surfaces:
First, too much time is wasted in solving one single problem. Of course, this system includes many minds working on the same idea and the competition to win the prize might give better results than patent or contractual R&D, but too many people gets involved and crucial man-hours are lost as most people involved in these competitions are highly qualified individuals who could have otherwise been solving other pressing societal problems.
Second, since it is about winning the prize and no rights are granted once the idea is out, a lot of energy is spent in generating the idea but too little a thought is put in implementing it. In a patent based incentive scheme, industrial application is a major factor to be considered and patents are rewarded based on the usability rather than a one-time prize money.
Like the drawbacks of patents and contracted research, duplication of efforts happens here as well. Moreover, if a person working on a problem finds a solution which he considers worth more than the prize money, he can always go for a patent rather than disclosing it at the end. This makes decided the prize money very tricky and proves to be a drawback for patent inducement innovation.
There is also a moral hazard problem with prize based incentive system. Winning prizes is considered to be an esteem recognition of efforts and huge prize money compels institutions/individuals participate in high paying/popular competitions rather than solving a problem which improves the overall well-being of the society.
Everything being said, let us now look into how prize inducement innovation can be used and where it should be limited. In my opinion, instead of considering prize as a one-time recognition of efforts, the winner should be treated as an idea partner and should be involved in the implementation phase. The prize money could then be lowered significantly and the profits can be shared with the innovator once it gets implemented. This solves all the problems identified with both patent and contracted research. The only problem of duplication of efforts could be solved by including other good ideas and working with them in the implementation phase.
Reference:
https://ssir.org/articles/entry/dump_the_prizes
https://en.wikipedia.org/wiki/Patentability
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Innovation inducement prizes are indeed one tool among others that can be used to enhance innovation. However, like patents and contracted research, prizes can’t solve every problem.
We should first notice that although prizes boost competition among innovators, they don’t stop the wasteful duplication of research on a same topic, the outcome of the “race to patent” doesn’t fully disappear with prizes.
The article mentions the absence of deadweight loss due to free access as a benefit for the society. But without exclusive rights granted, it may be not profitable for innovators to conduct research, specifically when the only possible reward is a prize because there’s an uncertainty about winning the prize while a patent ensures protection and potential revenues.
In fact, there is even no guarantees of the absence of deadweight loss afterwards as once an idea is made public without protection, large firms with a lot of financial means can easily capitalise on it and acquire or reinforce a monopoly position at the expend of those who conducted the research if they have significantly lower means.
One solution could be to set prizes with rewards high enough to cover R&D costs as well as the eventual commercialisation expenses for the winner. But then the lure of profits will encourage works towards marketable innovations furthering it from basic research and/or public goods. But even then, absence of deadweight loss and free-riding couldn’t be ensured. For instance, if there are many candidates for a single prize, and while the second best may not be an innovation as profitable as the winner, it could still be stolen by other firms leaving the initial innovator (the second best or every other candidate than the winner with a market implementable idea) without the prize reward and without the potential gains from the innovation.
Another way to allow initial innovators to benefit from their research would be to increase the prestige of the prizes instead of its financial reward. Therefore, winning a prize or just only competing for a prize could be used as a “free” advertisement or as a solid profitability argument in order to raise funds among investors. Although some prizes can capitalise on their historical aspect (such as the Nobel for instance), high rewards often go with high prestige. And it raises another problem, who pays those rewards? Is it the government or maybe philanthropists? Private firms can organize prizes but then shouldn’t we have an ethical problem with their private interests in doing so. Furthermore, as prizes work with specific criteria to address a certain problem or to encourage a certain type of technology they therefor lose the curiosity and spontaneity of innovation which brings us back to the moral hazard problem arising from contracted research.
As a conclusion, I would personally see prizes as a useful complement to patent and contracted research instead of a substitute. It isn’t sufficient itself to induce innovation when determined ex-ante but can be a wonderful bonus that can intrinsically increase innovators motivation to do their best. I would finish by saying that there will never be enough prizes to fully reward all innovations.
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Innovation in companies is an essential factor to support their competitiveness. R & D is the department that leads to the innovative character of products, processes and services. But within a company other actors can be at the origin of the innovation. Indeed, every worker, researcher, whatever his function, his training or his hierarchical position, can contribute to the innovation. They contribute by his innovative proposals to the competitiveness of his company. A manager can not afford to ignore the ideas of his collaborators. The employees are in daily contact with customers, suppliers and partners of the company. They are therefore able to identify difficulties and provide solutions, and even propose innovations
It is therefore important to encourage different players to innovate. One solution is the rewards. Germany remunerates its inventors as soon as the invention is exploited. Germany deposits and obtains between two and three times more patents than France. However, many innovators receive a patent without their innovation finally being sold. It is therefore possible to think that the company would be overwhelmed by requests for reward for inventions without interest.
The reward must therefore be well defined. The reward may be based on the number of units sold. If the reward is determined to stimulate the search it should not be too weak. Indeed this one will not be able to stimulate the research. However, if the reward is too high, the innovator will overpay what was needed to stimulate innovation.
An ideal remuneration for the innovator would be the premium to innovate. The innovation premium is an advantage that allows the employer to reward its workers for initiatives that bring real added value to their company. But this one remains difficult to calculate.
Source:
http://www2.crossknowledge.com/fr_FR/elearning/catalogues/formations/innovation-et-creativite/creer-une-culture-de-l-innovation.html
http://www.lemonde.fr/idees/article/2016/05/31/pour-favoriser-l-innovation-il-faut-recompenser-les-inventeurs-salaries_4929817_3232.html
https://books.google.be/books?id=lw2cqYRiUs0C&pg=PA103&lpg=PA103&dq=d%C3%A9savantage+de+la+prime+d%27innovation&source=bl&ots=i24YS-3SnD&sig=bRSpvNict48Rq-D_LBjYhVoWZ5U&hl=fr&sa=X&ved=0ahUKEwipveuA-7TQAhVGrxoKHQBdC_04ChDoAQgfMAE#v=onepage&q=d%C3%A9savantage%20de%20la%20prime%20d'innovation&f=false
http://www.ucm.be/Actualites/Prime-unique-d-innovation-reconduction-pour-2015-et-2016
http://economie.fgov.be/fr/binaries/prime_innovation_tcm326-112079.pdf
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Innovation inducement prizes are increasingly more popular due to their potential to spur innovation and allow greater technology diffusion. They are indeed a very powerful tool for attracting innovative solutions and they can also contribute positively to the social welfare. Many consider prizes as a prominent alternative to other mechanisms aimed at securing the innovation, such as patents and contracted research. In research fields, such as medicine, environmental sciences or other socially valuable sciences, we can indeed observe sporadically occurring negative implications of patents. This could be explained by the creation of the monopoly deadweight loss, which in turn contributes to a decrease in consumer welfare. Thus, it could be true that for those particular fields society is better off by implementing a prize system rather than the patent one. In any case, there still exists a great deal of uncertainty surrounding both its social value and R&D costs hence we should not draw any conclusions too rapidly.
Regardless of the sharp increases in the number of prizes and their recent popularity we can still identify a few potential difficulties arising from their usage. To begin with, there is no guarantee that the entrants with the best and most innovative ideas would be willing to participate, and as a consequence, we cannot be completely sure that the outcome will be satisfying for any of the parties involved. One could argue about the rationale behind this assumption since many prizes do not provide up-front funding for R&D and have quite strict timeframes, as as a result it might actually increase the possibility of coming up with the most efficient, low-cost solutions. In some fields it surely would not work this way, due to the higher overall costs of research, but I do believe in many cases this uncertainty about the potential outcome of the prize competition is much lower.
What is more, despite the fact that prizes do provide an incentive for the innovation to occur, either it is a monetary or non-monetary one, such as increased publicity, credibility and reputation, it is not possible to predict the extent to which this invention could be commercialized. Some argue that prize system might also lack a sufficient incentive for the entrants to develop the invention commercially, since they do not provide the same reward structure as patents do. Awarding a prize on the basis of a successful outcome usually means giving up control of the pathway to that success. However, there have been some cases of prize competition that has either laid the basis for the commercialization of a specific field or allowed the winning entrant to further reap the benefits of his invention. A good example constitutes a case of the winner of the NASA’s Astronaut Glove Challenge 2007, a prize aimed at introducing glove design concepts. Following his success in the competition he started a company and gained a contract to provide gloves to a spacesuits manufacture, which in turn contributed to this particular technology commercialization.
To conclude, the effect of prizes on innovation ultimately depends on the objectives of prize entrants, current economic situations and a broader technological context. In light of so many factors influencing its effectiveness I do believe we should focus on the ones we are able to control either fully, or at least to some extent. Designing and implementing prize competitions that put emphasis on collaborating with many experts and organizations decreases the possibility of some of the risks and uncertainties due to the possible higher innovative force. Increasing the engagement of both those groups together with clearly stating the need for the result-oriented mentality can indeed bring about many great new achievements as well as positive spillovers.
References:
1. Kay L., The effect of inducement prizes on innovation, R&D Management 2011.
2. Wagner EB., Why Prize? Surprising Resurgence of Prizes To Stimulate Innovation, Industrial Research Institute 2011.
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In order to stimulate innovation within important societal fields I personally think that a policy intervention is needed. Whatever kind of regulation set to stimulate innovation research and innovative knowledge would help market to perform better; if the market is left to work on its own, its forces (based on profits maximization and costs minimization) would lead to a pareto inferior situation for society as a whole.
A question that may arise then is: what is the relation between the policy intervention tools?
I think it is really hard to take a net position on this topic. One of the most interesting analyses to carry out is to try to identify which is the contribution that each solution gives to boosting innovation. With this perspective, I would like to illustrate the results of a work by L. Brunt, J. Lerner and T. Nicholas dated 2011 on inducement prizes and innovation in agricultural field.
In their work they take into consideration data on annual awards given by the Royale Agricultural Society of England for technology innovations throughout a century period of time, from 1839 until 1939. What I find interesting to stress here is the fact that they found evidence suggesting importance for medals incentive within this award-driven competition. In fact, the Royale Agricultural Society of England put at stake, not only monetary prizes, but also their valorous medals as rewards. This system proved to boost entry and competition within research in agricultural technological innovation field.
Deepening the analysis of the medals impact in boosting research competition for innovation in agricultural field, I would like to stress the fact that prizes, like in the case mentioned, may not be an incentive in terms of future profits for innovators. They may be profitable in other ways, for example in terms of advertisement for the inventor, or in terms of knowledge spread. Moreover, prizes usually may not recover the costs of investing in R&D. They better represent a reward for investments driven mainly by other incentives.
What I think is the best way to define patents/prizes relationship is the one of complementarity. As concluded by L. Brunt, J. Lerner and T. Nicholas (2011):
“prizes and patents may simultaneously generate incentives for innovation”.
When dealing with contracted research/prizes analysis, considerations are slightly different. The costs/profits consideration is not pursue when considering, for example, research fellows in research centers that have fixed salaries whatever their “innovation production” is. They may have a bigger incentive to be guided by some awards, being them monetary or symbolic, when working in R&D field.
I suggest that in sectors where incentives are mainly driven by future profits analysis and recovery of costs for the investment, prizes are not really worthy tools to consider. They may contribute to an extend, together with patents, to stimulate innovation but thet do not really have an impact only themselves. On the other hand, when considering sectors or fields or situations where awards and medals play an important role for the inventor’s objective, prizes seem to be contributing to the innovation competition process and production.
Source:
Brunt, L. – Lerner, J. – Nicholas, T., Inducement Prizes and Innovation, Working Paper 11-118, Harvard Business School, 2011
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Here is a question that might sound a bit strange: Would you turn down $1 million, which you have rightfully earned for an innovative achievement? The mathematician Grigory Perelman did exactly that, for his proof of the Poincaré conjecture. A mathematic problem which is one of seven “Millennium Prize Problems”, for which a solution is rewarded with $1 million by the Clay Mathematic Institute(1).
Even if the case of Grigory Perelman seems to be very extreme and not rational in any sense it shows us that there is not a “price” to everything, at least not to the achievement of Grigory Perelman. If we follow this assumption we also have to doubt the incentive effect of competition, which is based on the idea to reward the best or fastest innovation with a monetary gain. The reason this incentive not always improves the innovation process is that there can also be some negative side effects to competition such as less cooperation between researchers, increased selfishness and free-riding (2). This behaviour can especially in the area of scientific research lead to a high welfare loss. In an article about Perelman in the New York Times mathematics is described as: “a Wikipedia-like undertaking, with thousands of self-effacing scriveners quietly laboring over a great self-correcting text.“ (3).
Parelman criticised with his action that science has become to much focused on rewards and personalities than on the mission, to achieve new discoveries, itself. More and more competition introduced to scientific research could be one reason for it. I believe that prizes will not be the solution to that problem, especially because it manly acknowledges only the achievement of a small amount of individuals.
(1) http://www.claymath.org/millennium-problems
(2) Stucke M. E. (2013). Is competition always good. Jounral of Antitrust Enforcement, Vol.1, No.1, pp.162-197.
(3) http://www.nytimes.com/2006/08/27/weekinreview/27johnson.html
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To induce innovation, should governments and authorities set up “innovation inducement prizes” ? If so, what are the difficulties linked to it and when are they appropriate in comparison to patents and contracted research?
Both the European Commission and Barack Obama’s administration believe that prizes and challenges can foster innovation if the right circumstances are met. For instance, the European Commission Inducement Prizes is a new competition for European innovators that aim to deliver breakthrough solutions to specific issues. It is the perfect opportunity for participants to develop solutions to societal or technological challenges that haven’t been solved yet in hope of a financial reward. For both these institutions, prizes have a number of potential benefits such as the fact that you only pay for results, that a great diversity of individuals addresses the challenge with sometimes very different approaches, etc. Supporters of this system further argue that prizes allow the government to act where private markets failed. Moreover, they point out that prizes allow for targeting of particular problems so as to stimulate R&D in low-return issues. Finally, the prize system also lowers barriers to entry which encourage nontraditional parties to participate.
Hence, there are a few issues that arise with prize systems.
First of all, a fundamental issue is to determine how much should be spent on the prize system in total and how much winners should be awarded. There is a trade-off between a low prize that won’t effectively stimulate R&D investment and a higher prize that might lead to resource duplication.
As mentioned earlier, finding the right prize is sometimes tricky. It can for instance be linked to the size of its social value based on a set of pre-determined criteria as the MIPF does nowadays. The problem then is that companies and individuals taking part in the challenge have to bear the full risk of the innovation and the prize payments can be subject to major disputes and political influences because of a lack of clarity.
In addition to this problem, governments may experience administrative problems. For instance, the government may struggle ensuring that the studies around the benefits of a particular drug (that was discovered thanks to a challenge) are accurate as competitors would try to prove otherwise.
The prize system may also revealed itself to be inefficient and lead to duplication of resources. This problem also applies to the patent system and has been largely discussed during the course of Economics of innovation. We can only speculate about which will lead to greater duplication of resources.
Finally, the prize system may lead to new medical innovations but companies may lack sufficient incentives to develop the product commercially. We refer here to the example of penicillin which was an unpatented discovery not marketed until 15 years after its discovery.
So when are prizes appropriate compared to the traditional patent system?
Wright has shown that prizes are a better deal than the patent system for governments less informed about the costs of the innovation. This is for instance the case when looking at medical innovations (as pharmaceuticals companies do not usually disclose such information). On the contrary, patents are a better deal when the government has no way to quantify the social benefits of an innovation.
Some economists have also shown that the patent system incurs a deadweight loss that amounts to roughly $3-30 billion annually for the U.S drug market. They also showed that in the area of medical innovations, the patent system has contributed to higher prices for drugs and that many companies do not invest in R&D for low-return diseases. In that regard, the prize system might leave us better off than the patent system.
To conclude, prizes offer various advantages in the medical and pharmaceutical fields as governments can provide various incentives to help discovering drugs that provide medical benefits but are not seen as profitable by private companies. As a result, I would advise not to discard such system as it allows government to act where markets failed. Nevertheless, the prize system has some drawbacks that need to be addressed. Furthermore, it is not suitable in all industries, especially when the government cannot quantify the social benefit of the innovation.
References :
https://ec.europa.eu/digital-single-market/inducement-prizes
https://www.whitehouse.gov/sites/default/files/omb/assets/memoranda_2010/m10-11.pdf
http://www.bu.edu/law/journals-archive/scitech/volume131/documents/wei_web.pdf
http://press.princeton.edu/chapters/s9221.pdf
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It is clear that prize based incentivizing may be an interesting way to spur innovation whilst avoiding many of the flaws linked to patenting. That being said, it is a system that is far from perfect.
To begin with, prizes do not eliminate one of the biggest issues related to investing vast sums of money into R&D: there may still be a wasteful duplication of resources as different firms and/or people rush to win a prize. This would be the case if the prize money is grand. It would incentivize people to aim for a common goal and as such, there’s basically a guarantee that resources would be wastefully duplicated. This leads back to an issue related to the race to patent, which is that the first person to the innovation would reap all the rewards whilst the other people attempting to win the prize will have spent potentially significant amounts of money in R&D with nothing to show for it.
Furthermore, massive sums of money will need to be gathered in order to support the prize based programs because the monetary sum needs to at least match the extracted profit from the innovation had the innovator opted to patent. It may be more in a person’s financial interest to patent an innovation in order to exploit it singlehandedly rather than claim a one-time monetary reward whilst allowing everybody else to draw benefit from the innovation as well. Therefore, a massive monetary reward must be given to make this prize based system work.
This point also highlights another potential flaw which is that prized based models may remove the incentive for an individual (or firm) to commercialize said invention. This point is argued in Marlynn Wei’s article critiquing the medical innovation prize act of 2005. Wei used the example of penicillin and expressed a train of thought suggesting the fact that because this drug was not patented, it was neither improved nor commercialised for a large period of time (roughly 15 years). A firm has more of an incentive to commercialize (or license) a patented invention because it may be the only way to extract monetary gains and at the very least break even on the costs of R&D incurred in the development of the invention. An instantaneous prize may then remove any incentive to spend more money on commercializing an innovation since an individual or firm will have already drawn big benefits from the innovation without the need to incur the costs of commercializing the invention.
To add to this, the legal and subjective aspects of the prize system need to be considered. Committees will need to be set up to judge an innovation prize worthy or not. This raises various issues for instance if an innovation is judged insufficient in order to claim the bounty, the innovator has poured resources to develop an innovation that is now both public (competitors will in theory be able to use it) and not rewarded monetarily.
Finally, the prize based system detailed in the blogpost, whereby even prototypes are rewarded, may be inefficient. There’s a difference between coming up with a good theoretical idea and coming up with an innovation ready to be used and ready to impact professional real life situations. This is a point brought up by Kevin Starr in his article on the Stanford Social Innovation Review website. Are prizes destined to reward good ideas regardless of how improbable and unpractical they are or are prizes put in place to spur innovation that will be able to impact and render different sectors more efficient?
Sources:
1) https://ssir.org/articles/entry/dump_the_prizes
2) Wei, Marylnn. “Should prizes replace patents? A critique of the medical innovation prize act of 2005.” B.U. J. SCI. & TECH. L. Vol. 13:1.
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Innovation inducement prizes have the great advantage to overcome the limitations of patents such as the dead weight loss and the moral hazard. In addition, it allows to pass the innovation immediately into the public domain.
Those inducement prizes are far from being perfect, however. We can determine a few issues.
A first problem is related to the size of the price. “If the size of the prize is set too low, it may fail to spur research. If the size of the prize is set too high, sponsors may overpay relative to what was needed in order to spur the development of the technology”. This prize can become really high if the R&D are significant. It’s important to notice that those R&D costs may be hard to evaluate and, even if it’s the case, the probability of success of the innovation has to be taken in consideration as well.
The second issue might be regarding the provider of the prize. Is it the local government? But, he has to raise taxes for it and the taxpayers might have different priorities regarding the category of innovations they want to privilege. In the case of global public goods, it might be difficult to find someone who will deliver the prize. A coalition of governments? A philanthropist may be?
Further, we noticed that some prizes remain unclaimed and haven’t been granted to anyone yet. This can’t be caused by a too low reward, but the lack of communication on those prizes is surely one of the main reasons to this failure.
A fourth problem faced by inducement prizes arises once the subject offering the prize becomes the owner and the responsible for the prize, leaving the initial inventors not accountable for their results. Who should be blamed in the case a government becomes the holder of a fundamental innovation (such as a drug) that has undesired consequences on a patient.
A last issue that I wanted to highlight was the legitimacy of the judges. They might be bad-informed or unqualified. In addition, they could be tempted to reward the innovation to the best-known firm. Kevin Starr calls this the Bandwagon effect: the more prizes you get, the more prizes you get. Big companies which are lobbying might influence judges as well.
To conclude, I would say that inducement prizes have many drawbacks and they seem unlikely on big markets with high R&D costs since authorities might not always have enough money for it. If the authority really wants to have the innovation in his own hands, however, it could possibly use non-pecuniary rewards which could ameliorate the prestige/reputation of a company. I also believe it would be efficient to introduce prizes on markets were less firms invest because of the lower economic returns. This could be the case on the market for rare diseases and would thus increase social welfare.
Sources: https://studylib.net/doc/11894312/innovation-inducement-prizes–connecting-research-to-poli…
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Government-awarded prizes to spur innovation?
Although prizes can be awarded by public or private institutions (e.g. foundations), I will focus my comment on demonstrating the specific thesis that government-awarded prizes aren’t more effective than patents in promoting innovation.
Let’s at first aim attention at patents. As said in Paul Belleflamme’s article, the main drawback of patents is that they impose a monopoly deadweight loss. This could be true in a purely theoretical environment but we all know that most of the time theory and practice largely differ. In fact, patent owners do not have economic monopolies as there is a fierce competition on the technology market and that consumers have the choice between substitute goods and complementary technologies. Hence, the free market fosters competition, drives the prices down and limits the deadweight welfare losses.
On the other hand, government awarded prizes do entail deadweight loss as they must be paid by tax-payers’ money. Moreover, organizing such a contest requires to invest in heavy administrative costs in managing the contest and selecting the winner. Furthermore, it could be that government agencies select the winner, not based on allocating efficiency but based on other objectives such as promoting influencing groups of voters, increasing employment, regional economic growth or support for political causes.
Another drawback of prizes is that the resulting invention is then available to the public in free access. But without any financial incentive (i.e. patent) to commercialize it, there is no certainty that any firm will be willing to produce it. A second possibility, would be for the government itself to develop and sell the prize-winning innovation but this would require public agencies to develop at cost a business expertise that is already available in the private sector. Ideas are easy but implementation is hard.
Thirdly, to organize efficient contests, government should be fully informed about inventions, technology, the market (demand) and the industry (production costs) which often isn’t the case. For instance, the 2009 H-Prize was never awarded because of an overly narrow scope that attracted only two challengers.
Finally, let’s not forget that a central feature of prizes is that they intend to maximize effort, not efficiency. Indeed, prizes races are like patent races as they both generate a wasteful duplication of efforts: a lot of contenders invest time, money and skills but in the end, there is only one winner.
As a conclusion, I’ve listed hereinabove the reasons why government awarded prizes are not as efficient as expected to spur innovation and its implementation. Patents haven’t yet said their last words…
Sources:
Dump the Prizes _ Stanford Social Innovation Review
Spulber_Prices_versus_Prizes
Using prizes to spur innovation _ McKinsey & Company
Using prizes to spur innovation _ MIT News
Whitepaper-challenges-prize-programs-and-opportunity-government
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The idea that the patent system should be reformed is not new, neither is the idea that prizes could replace them. Critics of the current patent system, such as Joseph E. Stiglitz, argue that patents fail to provide incentives in key sectors where innovations are not commercially marketable, for example finding a solution to global problems such as AIDS. Another argument often heard is that because R&D costs can be huge for new technologies, private companies will charge high prices on their final products. This is particularly an issue for the developing world as it gives them no access to these sometimes essential technologies. Although prizes could offer an alternative to patents and solve some of the issues such as the deadweight loss or moral hazard, I will list here a number of their limitations.
1) The process of innovation is the combination of two key features: newness (invention or discovery) and change (being able to put the new product or process on the market in a viable way). Prizes are better at the first stage, proving a concept, and they often do not require to deliver a viable commercial product. For instance, it was Virgin Galactic who licensed the technology under the Ansari X prize and they are still investing millions today to make commercial use of it.
2) Prizes are designed to incentivize researchers to find the next spectacular thing, such as an invention to solve the carbon emission problem. Although many experts believe that the best way to solve this issue is to change individual behaviors towards an eco-friendly consumption. By focusing on facts, prizes will never reward such an effective solution which does not involve any spectacular act but rather scaling existing technologies and changing business and individuals.
3) Prizes focus on solving very specific problems but do not care about the unexpected lucky breaks that have delivered some of the most significant, often highly disruptive inventions. For example, when Bell invented his “electrical speed machine”, it was not recognized as a practical application to solve any specific problem of the time. Today, we know his machine as the telephone!
4) The power of a prize stops at the moment it is awarded. Indeed, patents have the advantage to incentivize the researchers to find new applications of existing technologies. For example researchers at the University of Oklahoma found that a cholesterol drug approved 15 years earlier significantly lowered hepatitis C viral loads in infected patients. Prizes, once awarded, would not have given the incentives to make use the current state of the art because they constantly require finding new “big things”.
5) Prizes face the sensible issue of responsibility as inventors are not accountable for their discoveries but it is instead the government who offered the prize. This is particularly a problem in the drug industry for example. Indeed, private pharmaceuticals firms invest millions to make sure that a new drug is perfectly safe. Despite the fact that prizes in such industries would have to be colossal and ultimately coming from taxpayers, once the new drug is found, the awarded inventor is no more responsible for any problem down the road. The responsibility is now in the public domain! Prizes in such industries would result in efficiency issues during the development of products.
In conclusion, Prizes can operate as useful supplements to patents in certain circumstances. But by so tightly managing and controlling innovation outcomes, prizes are unlikely to incentivize, reward, and deliver the breakthrough technologies, treatments, and inventions necessary to solve global environment, public health, and other challenges.
Sources:
http://www.law.northwestern.edu/research-faculty/searlecenter/innovationeconomics/documents/Spulber_Prices_versus_Prizes.pdf
http://www.bu.edu/law/journals-archive/scitech/volume131/documents/wei_web.pdf
http://www.theglobalipcenter.com/sites/default/files/reports/documents/Prizes__Patent_Pools.pdf
Innovation Management class.
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Innovation inducement prizes represent a different way to increase the amount of innovations, of knowledge. These contests can be good instruments to get an invention that solves a specific problem and, if used optimal, only a small numbers of inventors start working on this project, the ones that are the most skilled for this particular problem, meaning there won’t be that much duplication of research. However, it is not always the case and contests “fail”. In all likelihood, the cause of it was a bad design of the contest. Besides the problem with the optimal design of the contest, there are also cases when it is not wise to solve a problem by using the “contest-way”. First I’m going to talk about the difficulties that can occur when designing a contest and in the second part I’m going to present my thoughts on why in some cases one shouldn’t or can’t use contests.
1)
The most important factor which leads to success or failure of a contest is the contest’s design. The design of a contest includes the rules which are set, the incentives for the possible innovators and also the use of the winning solution at the end. I want to highlight some of the problems that an can occur using a prize contest by using a government as an example which wants to create a prize contest to solve a specific problem it faces.
The government wants the most capable innovators to solve their problem and therefore it has to incentivize these innovators. To get these innovators started, the government has to give them something for being successful that has a higher return than if they would work on another project. The most common way to incentivize innovators is to offer money as a prize. This is the first spot where difficulties can occur; the amount of money promised by the government for solving their problem is crucial. If the prize money is too low no inventor will start working because she knows that the money prize in case of success is lower than the upcoming cost or that she can work on another project where the possible return is higher. On the other hand, if the amount of money promised is too high there will be too many persons and groups starting to try to win the contest. This means the chance of research duplication increases and, in addition, by using unnecessary research capacity maybe inventors are drawn from other more important projects.
Money is the important factor to incentivize innovators but there is more to it. The government has to decide what kind of contest it wants to design: there are two different kinds of contest types, the “best-entry contest” which has a deadline or the “defined-object contest” where there will be no deadline. If the government uses an inappropriate contest it can lead to a suboptimal outcome: When using a “best-entry contest” the government can’t be sure that under the submitted inventions there is a fully usable invention. Maybe it is just a very good prototype which would need more development but who is going to do more research on it after the contest. On the other hand, if the government uses the “defined-object contest” it gets a fully applicable solution but maybe then this inventions is not needed anymore, leading to two possible problems: An innovation is presented inside an timeframe but not usable right away or the innovation is usable right away but not presented inside an acceptable timeframe.
At this point, the government decided on the optimal amount of prize money and contest. With this in mind, let’s look at the difficulties that can show up by setting the rules and selecting the winner.
The rules also influence the outcome of a contest: by setting rules the government tells the innovator what problem has to be solved, under which conditions it has to be solved and how the governments determines the winner.
Clarifying the rules and conditions under which a solution has to be found is a key point because if the government doesn’t exactly tell the innovators what to solve and how solve it then, at the end, there is a high chance that there won’t be any innovation that exactly tackles the faced problem. Provided that the government did everything in an optimal way, there are more difficulties that can appear in the winner selection process. If the jury is biased and not objective this will result in less innovators participating in future contests, reducing the possibility of having the most skilled people working on finding a solution and also reducing the possibility of having a useful solution at the end itself. This reduction is as well influenced by the way the prize money is distributed and when it is distributed. If the government uses a winner takes it all system in the “best-entry contest” and the second and third place would get nothing then the innovators would think twice before entering the contest because the research cost won’t be even partially covered.
The last difficulty in designing a contest I want to talk about is the handling of the property rights. The government has to decide whether the innovator can keep the property rights and get the prize money or if they only can take part in the competition when they give the rights of the innovation to the government. By letting the innovators keep their property rights and allow them to file a patent the government increases the amount of inventors who will participate in its contest. But if the government doesn’t own the rights afterward there is a high chance that the innovator takes the prize money and uses the invention to maximize profit. This inventor/ company can take her/its innovation, create a monopoly in the sector of this innovation and generate a dead weight loss. This leads to a similar outcome as in the case of a patent, with the difference that in the case of the contest the government used public money to fund the contest. On the other hand, if the government gets the property rights, in e.g. the case of a dug, and gives the rights to the public it is not clear who is responsible when problems emerge.
A more general difficulty of prize contest is that assuming there are only prize contest and no other ways to incentivize innovators then there won’t be any continuation of research dedicated to any subject after the end of the contest. This would lead, very fast, to a decrease in innovation and at the end to a decrease of growth and development in a country.
2)
Even though innovation inducement prizes seem to be the answer for every problem there might be cases when one shouldn’t or can’t use contest to solve a problem. I divided these cases into two different categories. The first category contains cases when it is morally wrong or too dangerous to use contest and the second category are cases where the goal is to reduce dead weight loss and increase society’s utility.
Within the first case I put the development of weapons and the research on toxic and dangerous substances: To let everyone do research in these areas is morally reprehensible and extremely dangerous. The research in these areas has to be done by experts, inside a controlled framework and guarded because one can destroy a lot when the research is not done carefully.
The other group contains cases when a government wants for example a drug to fight a specific disease. Researches in these areas require a huge amount of equipment and know-how. Therefore only institutions, universities or companies can participate but not all will. Businesses that want to maximize their profits are more likely to invent a drug on their own, patent it and own money by having a monopoly. When universities and most other institutions participate they can find a solution for the disease but they can’t produce huge amounts of these drugs in an industrial-scale. Furthermore, testing and getting a permission to sell the drug on the market takes a long time and universities could use their resources better somewhere else. Consequently, patents seem to be the better options in this field.
In conclusion, inducement prize contests have their difficulties and can’t be used in every situation but they can be a complement in the toolbox for promoting innovation.
Sources:
• Burton, M. Diane and Tom Nicholas. 2016. “Prizes, Patents And The Search For
Longitude”. Explorations In Economic History. doi:10.1016/j.eeh.2016.09.001.
• “Concerning Federally Sponsored Inducement Prizes In Engineering And Science”.
1999. The National Academies Press. https://www.nap.edu/read/9724.
• 2016. The Global Intellectual Property Center. http://www.theglobalipcenter.com
/sites/default/files/reports/documents/Prizes__Patent_Pools.pdf.
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As a response to the flaws of the patent system, some proponents argue that innovation inducement prize is a perfect alternative to incentivize innovation while overcoming the disadvantages generated by the patent system. However, I will argue that, even innovation inducement prize can help to overcome some issues generated by patents, it may not be appropriate for some type of research, namely research for drugs or medical treatment.
Innovation inducement prize consists in awarding a monetary reward to the innovator who is able to solve a current problem defined by a government agency or a foundation. Contrary to the delivery of a patent, a prize has the benefit that it does not create a deadweight loss as no monopoly rights are granted to the innovator.
However, rewarding an innovator with a prize may also generate some costs and, more importantly, may not be feasible to implement in all types of research.
Indeed, one knows how costly and time consuming it can be for a firm to invest in R&D to develop a new drug. The prize that is given to the most successful innovator has to be large enough in order to cover both the costs in R&D of the innovator as well as to incentivize firms to undertake research. This, in turns, will be expensive for the tax payers.
Besides, the power of a prize ends at the moment the reward is granted, whereas patent system creates incentives for innovators to continuously improve their inventions. This aspect is particularly true for the pharmaceutical industry. Indeed, the US law, for example, allows medicine manufacturers to obtain new patents on existing drugs when someone discovers a new application of an already existing drug. (For example, a cholesterol drug which can also be used for the treatment against hepatitis C can have two different patents). If a prize, instead of a patent protection, was awarded to the first discovery, which was the cholesterol drug, no further research would have been undertaken to find new application of the same drug.
Finally, innovation inducement prize lead to a transfer of responsibilities from the inventor of a product that won the prize to the government that awarded the prize. For the pharmaceutical industry, it means that the government will become responsible for the distribution of the new treatment and the risks surrounded by this treatment. Once a problem will arise, it will become a complex task to define who is guilty in this context.
As a conclusion, prizes and patent are imperfect substitutes. Innovation inducement prizes overcome some of the drawbacks of the patent system. However, by giving full attention to innovation inducement prize, one ignores the existing limits of this alternative way of incentivize innovation.
References
http://www.druid.dk/conferences/summer2002/Papers/DAVIS.pdf
Prizes and Patent Pools Viable Alternatives to the Patent System?, Global Intellectual Property Center http://www.theglobalipcenter.com/sites/default/files/reports/documents/Prizes__Patent_Pools.pdf
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Implementing innovative solutions requires funding, as well as incentives for the innovator. There are many ways to support innovators: from public interventions to the market-based patent system.
Public interventions include rewards and research funds such as grants or subsidies. This means that society as a whole, pays through taxes for innovative ideas. In a way, it is positive because innovation becomes a public matter and it promotes a socially beneficial solution. Many innovation prizes focus on sustainable development, environment, energy, malnutrition or diseases such as HIV. The innovation prize for Africa (IPA) is an initiative of the African innovation foundation looking for cutting-edge innovations that reflect positive social impact and can be transformed into a sustainable commercial success. The grand prize-winner receives 100k US$ and business development is offered for the top ten innovators.
However, we often forget the main difficulties that such a prize system presents. First of all, you need the approval of the government to finance this innovative public good. The large sum needed is not negligible, especially when it comes from taxes. There will definitely be some who will not be in favour of the idea, even more so if they have to overcome personal financial issues (free-riding). This is particularly the case in less economically developed regions such as those in Africa where governments have limited resources and other urgent priorities. Coordination should be re-enforced by a form of public agency, which could negotiate with authorities, encourage collaboration, and set up a financial plan. According to McKinsey’s report, many recent contests were organised by wealthy individuals who independently undertook the costs.
Another difficulty of the prize system is the subjective aspect of the competition. It is about “picking and choosing” a few among a lot of good initiatives. To implement this system on a large scale would mean sponsorship by a government or large organization, which would decide on and distribute prizes for innovation more equitably. This would naturally mean higher costs for taxpayers, and it drives us directly back to difficulty #1.
Corruption can also pose a problem for the reward system. Agreements may be concluded between an innovator and public agencies. The greater the prize is, the greater the incentive is to collude. Innovators who did not win can also see their ideas being used or expropriated by others after the contest. Unless the invention is patented, no invention is protected from infringements.
Finally, there is also the problem of information uncertainty. It is almost impossible to estimate the cost of research before starting anything. Even when knowing the costs, there is still a risk that the innovation fails. There is also uncertainty around the demand for the innovation. Will it work? How can we know if in 5 years’ time it will still be trendy or viable? This is why the prize and reward system should only be used when the information is perfect.
This final difficulty brings us back to the benefits of the patent system. Under imperfect information, it is the market that determines the value of the innovation according to the private information. Patent systems also facilitate coordination among actors, trading technologies and collaborations between firms.
After analysing all the difficulties that a reward system faces, I can now conclude by saying that prizes have a lot to offer in fields such as medicine or environment. There is less motivation to innovate in these fields than for example in electronics or technology where being the first already gives you significant advantages. Prizes offer to society a variety of new ways to promote change: “not only by identifying new levels of excellence, but also by changing wider perceptions, improving the performance of communities of problem-solvers, building the skills of individuals, and mobilizing new talent or capital”. I believe that the optimal incentive that can be given to innovators is a system based on patent protection and small-scale prizes that could benefit society.
– https://www.patexia.com/feed/pros-and-cons-of-patents-and-prizes-20121221-2
– http://innovationprizeforafrica.org/
– https://ec.europa.eu/research/horizonprize/index.cfm?pg=prizes
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First of all, we should keep in mind that as Mr Belleflamme remind us in his article, the goal of a pattent, contracts or prizes is to induce research and innovation when the goal of today’s society is to secure growth and economic development.
In the one hand, we know that patents and contracted researches have both their drawbacks both on an ethical and economical point of vue. In the other hand, innovation inducement prizes(IIP) has the same goal but attract more individuals and teams to join the rally. Indeed, the big difference that IIP has with patent is the fact that, when a patent is given on a particular technology, it prevent other individuals or teams to use further researches using that particular tech. for commercial purpose (so they don’t have any economical incentives to continue) (1) even if they found it by themselves. Indeed, IIP do not gives nor monopoly on a technology, nor duplication of effort because you can use researches of others in order to improve yours.
Is then Innovation Inducement Prize the perfect tool ?
The main idea behind Innovation Inducement Prize is the competition concept. Indeed, here, many teams can join the race for a same prize (linked to a particular field). This concept leads to several drawback what concerns IIP, I will focus on one.
Regarding the incentive to innovate, we should keep in mind that innovation is composed of two main phases : creativity and innovation implementation (2). Both of those phases have very different condition in order to be successful. What concerns the innovation implementation , a competitive environment could push a particular company to implement but regarding the creativity, it has been determined that it would be more successful in an environment free of pressure (3) and competition is a source of pressure.
The fact that IIP create a research on in a competitive environment could then lead to a first non efficient phase and therefore, the only people that would be able to stay in the race are the ones that are able compete and create at the same time. and it does not always mean that they are the people that could have had the best idea.
In conclusion, Innovation Inducement Prize is, in some regards, an amelioration to patents and contracted researches. However, it is a tool that should be used carefully and should, in my opinion and in the light of the sources I used, be improved by diminishing the competition it leads to during the creative phase of innovation.
BELLEFLAMME,P., LLSMS2041_primer_IP.pptx
BAILLY, B., Slides of the course Innovation Management, Session 5.
WEST,M.A., Sparkling fountains or stagnant ponds: An integrative model of creativity and innovation implementation in work groups, Applied Psychology : an international review, 2002, 51 (3), 355–424.
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As Peter Diamandis said « focused and talented teams in pursuit of a prize and acclaim can change the world ». The X-Prize founder understood that to spur innovation money is not sufficient. Prizes for innovation are emerging as they reward innovation not only with money but also with recognition. Therefore we have lived a skyrocketing increase of the number of world prizes worthing more than 100 000$. McKinsey have published a chart showing this increase: in 1970 there was prizes around the world whereas there was in 2008 more than 300.
Reports such as the McKinsey report, have shown the efficiency of prizes for innovation. It is « a unique and powerful tool » with many advantages. It encourages specific innovations, changes wider perceptions, mobilizes new talents and capital and has many other benefits. The utility of prizes can’t be debated as it has been proved more than once. However prizes may have difficulties of their own and disadvantages.
First, prizes do not exist for all innovations. It is indeed present in only certain fields. For example it exists in aviation but not in space technologies. One reason is that rocketing is not attractive for the public, sought as incredulous. Furthermore prizes have a commercial goal and thus the innovation have to improve performance or profit.
Another inconvenient is that prizes do not provide any up-front cash flow to help with the early expenses. Moreover with the uncertainty about the success of the innovation or even winning a prize, talents might be reluctant to innovate as it might be a waste of time and money. However this argument can be countered because innovators often think that they are the best and that they will win the prize for sure. But the entrepreneur will have to bear the financial risk.
There might also be a duplication of the research efforts if different talents compete. According to the article: « the surprising effectiveness of prizes as catalysts of innovation » this inconvenient has been overcome with the internet with the example of the Netflix prize where all was shared so that the effort was centralized.
An asymmetry of information exists between the innovator and the one offering the prize. Maybe as the innovation might look appealing the feasibility isn’t as certain as it looks. One can give a prize to an innovation which appears not to be feasible.
Finally prizes is very expensive. The one offering the prize have to evaluate the amount of the prize which will be attractive enough for entrepreneurs. This amount is hard to evaluate and might often be overestimated.
In the article, prizes are presented as a new inducement for innovation that can overcome patents and contracted research’s disadvantages but prizes have their own inconvenient might not always be appropriate.
http://www.mckinseyonsociety.com/downloads/reports/Social-Innovation/And_the_winner_is.pdf
http://www.mckinsey.com/insights/innovation/using_prizes_to_spur_innovation
http://www.economist.com/node/16740639
http://33bits.org/2011/06/06/the-surprising-effectiveness-of-prizes-as-catalysts-of-innovation/
http://www.uschamberfoundation.org/power-prizes-incentivizing-radical-innovation-0
http://keionline.org/misc-docs/RFF_CTs_04_macauley.pdf
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As presented in this article, innovation inducement prizes has everything to be preferred. It eludes some important problems of patents or contracted research such as dead weight loss, no exclusive rights or immediately public publish) .Moreover, it does not raise any moral hazard because all the decisions remain to the innovator.
However, in my opinion, innovation inducement prize is not at all a magic remedy. It also suffers from different disadvantages and must be used in particular manners.
First, an important point to notice is that the prize is not only used to correct some limitations but it also has other functionalities. One of those is that it raises awareness and prestige for the firm (or organization) by bringing “publicity, attention and credibility” (1). A good example is a DARPA report (American Defense Agency) which concluded that a media coverage in a defense program between 2004 and 2005 attracted innovators that have not worked before with DARPA (2).
Then, there is a high disadvantage of innovation inducement prizes. This method will bring a much higher number of competitors to solve a problem than the patents and contract research. Moreover, there are lower control on these participants than the other methods. It implies that even if there are a higher number of innovators that can be seen as an asset to reach the solution, my opinion (which is supported by different studies) suggest that this high number of competitors will have a negative impact on the incentives to find a solution. Following a study of Boudreau and Al., a high number of competitors on an innovation contest will imply that individual contestants will be less likely to win and will be less performant (3).
Additionally, another problem of these kinds of contest is the fact that like all contests, there are only a few winners at the end and their idea will be the only one selected. But it is not always because they were selected that they were the best, it can be because this team was the one who defended the best their idea for example. It can be more efficient to analyze and gather all the ideas to make a perfect plan, but it does not arrive because the highest incentive of this contest is that there will be a few winners who will gain a very high reward.
The last point that I wanted to arise is the fact that when a firm/organization uses an inducement innovation prize to address a problem in place of patents or contracted research, the problem is that they cannot always expect the same professionalism, specifications and perfection than with another method. A high problem is that the firm/organization can put too much specifications and conditions which imply that because it a “contest”(so a reward is paid only if selected , so it is not guarantee) , the candidates won’t complete the mission with the same level of exactitude/professionalism and some time, no one reach the expected solutions. (4) There are 2 main examples that support my viewpoint.
First of all, in 1992, a group of electric utility companies offered $30 million to develop a refrigerator with high environmental energy efficiency standards. Whirlpool won the contest but a condition was to sell a certain number of refrigerator after 5 years. They did not reach this level of sales and so, they lost the bulk of their prize.
Another example is a $1 million prize established by the Rockefeller Foundation in 1994 for a low-cost, rapid, easy-t-perform diagnostic test for gonorrhea and chlamydia for developing countries. It appears that anyone claimed the prize because there was too much requirements (99% accurate, very low cost per unit, provide very fast results,).
To conclude, an inducement innovation prize can be an “innovative” way to find new ideas and to solve the different problems that can face patents or contracted research. However, it is very important to use them in specific ways and to pay attention in the use which is done with them. For example, it can be ineffective for a very specific mission (with a lot of requirements) or because the high number of competitors can be a high disadvantage as explained.
(1)https://www.nesta.org.uk/sites/default/files/impact_of_innovation_inducement_prizes.pdf, The impact of innovation inducement prizes
(2) http://www.innovation-policy.org.uk/compendium/reference/Default.aspx?referenceid=1638
(http://www.druid.dk/conferences/summer2004/papers/ds2004-114
(3) http://www-2.rotman.utoronto.ca/facbios/file/bls.pdf, Incentives and Problem Uncertainty in Innovation Contests: An Empirical Analysis, Boudreau, Lacetera and Lakhani.
(4) Innovation inducement prizes: Connecting research to policy, Heidi Williams, journal of policy and management.
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A discussion about a prizing system replacing the patent one emerged in economic papers. The idea of the prizing system is that a central planner intervenes to replace the monopoly gains for the original patent holder by an equivalent amount of money. This new system would solve some problems faced with the patent system (i.e. patents create a temporary monopoly, which induces a dead weight loss for society) but is based on the hypothesis that the only thing that matters for innovators that apply for patents are the benefits of the monopoly. This hypothesis is not reasonable. Therefore, the analysis of benefits and disadvantages of prizing systems compared to patents has to be renewed without this hypothesis.
Under the assumption that innovators have other motives than the temporary monopoly profit while patenting their innovation, prizing systems seem to have several advantages compared to patents: no need for a market for technologies (no licensing), easy sharing of the prize among collaborators, less risk to have a tragedy of the anticommons… (see J. PENIN, Patents versus ex post rewards: a new look (Research policy 2005)).
But, there are some drawbacks of prizes. The main complication is that they are not easy to implement: the central planner who decides of the prize should have a perfect access to information. Otherwise, he won’t know the amount of the prize (that should be exactly equal to the social value of the innovation). Most of the time, he doesn’t know the exact social value of the innovation. And even if the information is complete, other problems are encountered with prizing systems:
First, you’ll never be sure that the information released by the person receiving the reward is complete, while you are pretty sure it is when the innovator uses a patent system. This is due to the fact that the knowledge immediately becomes public and can be used by everyone while patents don’t allow everyone to use the made-public innovation.
Second, rewards don’t allow to enforce our claims on our collaborators (rewards don’t have the same weight as patents). Therefore, collaboration is less favoured with rewards than with patents. This is also due to the fact that rewards don’t encourage firms to work with others and to see what others do. This means that duplication of research effort could occur with higher probability.
Moreover, prizes lead to a decrease in social welfare when they’re used in some industries. I think the reward system would be more effective in terms of social welfare in small industries, in markets that are not well-known. Indeed, the prize system allows everyone to access the information and to learn about the innovation. These innovations can then be used by others to make further improvements and innovation. On the contrary, if these “small-market innovators” had to patent their work, other innovators may not want to pay to use their innovation or not know easily about them (because they’re so small), which could be really useful, though. As a consequence, social welfare would not be maximized. All in all, the prizing system in small industries would give incentives to innovate in these markets.
As a conclusion, prizes are a good alternative to the patent system, but we should find a more effective way to implement them (find the right prize). Moreover, a detailed analysis of the market on which we want to use the prize should be done systematically, to see if it really increases social welfare. If not, a patent system could be preferred.
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Prizes to reward is as old as the humanity, we have examples of such things like it is said in the article “Beware! Privateers patrol these patent waters.” But we can also find older example: the tallest part of the treasure for the best fighter, the greatest part of the hunt for the one who killed the beast… Following this ancestral tradition it seems logical to maintain a part of the benefits to the one who invent something.
At this point we have to differentiate two types of innovators: the first one is those who really find the innovation, i.e. a person or a team working on a project and finding something new; the others are often the one who set a patent on this innovation, commonly the enterprise for which the previous one works.
Concerning the first type of inventors, a good way to offer prize to them is to let them benefit from a small percentage of the revenues produced by the innovation. In the case of a single creator who patents it on its own name it is mostly the case but this practice is less spread when the innovator works for a firm.
Different organization already work with this principle today, this practice is more widespread in the United States that in Europe where the inventors may receive a part of the benefices of their innovation.
For the second case, it seems legit to use a system of prize to reward them. Launching some contest in which the innovator of the year can be chosen sounds like a good way to encourage enterprise and personal initiative. There is obviously the financial aspect of such a reward that will attract people, but moreover there is also the recognition that such a price may bring to his inventor. This part is often neglected by people using innovation but for the people who create it; this is often the most important recognition.
People seem to have understood the importance of rewarding innovators. Since 2000, philanthropic prize have grown sharply in size, number and variety. Philanthropic and private businesses prizes are raising, their main goal are to encourage innovation and achieve social benefits. Those prizes are designed to provide incentives for specific innovation rather than to reward excellence. That means that people are less inclined to innovate by themselves if there is no return after their work.
Such prizes offer benefits to both parts, the launcher of the challenge and the innovator. This is why those challenges have been used for centuries. National challenges have used those prices to respond to their problems: the vaccine inoculation, the lifeboat, new-food preservation… all of these successes have been found thanks to challenges launched by the government.
As a conclusion, we can say that the prizes system is actually superior to other mechanism as the patents or the grants. Even if those mechanisms are still well used, they have limitations. This is why prizes will probably stay for a while and need to be encourage by the government but also by private investors.
http://www.mckinsey.com/insights/innovation/using_prizes_to_spur_innovation
http://www.mckinseyonsociety.com/downloads/reports/Social-Innovation/And_the_winner_is.pdf
https://www.ipdigit.eu/2013/06/beware-privateers-patrol-these-patent-waters/
https://www.ipdigit.eu/2011/10/what-to-think-of-patent-trolls-the-return/
https://www.ipdigit.eu/2013/10/the-economics-of-copyright-protection/
http://news.mit.edu/2013/innovation-prizes
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Mr. Belleflamme begins the present article by discussing the various advantages and disadvantages of patents and contracted research. Afterwards, he presents innovation inducement prices as a possible alternative to the two former. In the following, I will extend upon Mr. Belleflamme’s comparison of innovation inducement prices with respect to patents and contracted research. In particular, I question whether prices can actually improve economic efficiency and reduce moral hazard in the process of innovation. My overall skeptical position towards innovation-inducing price mechanisms is rounded off by an allusion to the negative effects that prices may exert on the financing of innovation.
To begin with considering the pros and cons of innovation inducement pricing vis-à-vis its opponents, I want to add to the discussion that prices feature a crucial drawback which Mr. Belleflamme also mentioned in the context of patents. Hereby, I relate to the wasteful duplication of research efforts that already constitutes a problem with conventional patents. This inefficiency is likely to be even more present with innovation inducement prices, since a further decentralization of the research effort in the economy can lead to an overinvestment of resources by individual actors that stands in no relation to the respective results. Furthermore, it is well-known that human nature tends to the devotion of considerable attention to current and heeded events. Here, the excessive publicity that the exclamation of a price on a particular research topic will probably receive may extract necessary resources from equally important, yet rather “unattractive” scientific and technological fields. Additionally, the decentralization of research efforts can even lead to an increasingly arbitrary price setting. Hereby, I mean that if various groups or individuals choose to price a particular innovation according to their own preferences, this may result in a smaller benefit to the overall society than if research would be contracted by governments, since these are at least formally obliged to act in the interest of their citizens.
Another argument against inducement prices weighs even heavier. That is, the present article featured an excerpt of a 2009 McKinsey report which highlighted various historical examples of individual entrepreneurs who eventually became innovators via the existence of prices. What the McKinsey article neglects, however, is the current organizational complexity and expensive infrastructure that (at least from the outside) seems necessary to achieve substantial progress at the forefront of current research in the 21st century, be it in areas of pharmacy, biology or physics (with the CERN in Switzerland providing a prime example here). Accordingly, one can expect that, even under a regime of innovation inducement prices, most important research projects will still be carried out by large research institutions and their corresponding networks, instead of the ideal individual entrepreneur. Moreover, the organizational structures within the research facilities of e.g. large pharmaceutical or chemical companies might not be quite so different from conventional government research institutions. In his seminal book “Whither Socialism?”, Joseph Stiglitz indeed relates to the strikingly similar problems that both large private companies and state-owned companies need to deal with in the presence of information asymmetries and the resulting moral hazard. One can conclude that, even if innovation inducement prices can incentivize private innovators to join competition, the kind of private innovators that will be most likely attracted may face the same inefficiencies as their governmental competitors.
Finally, prices not only base on the concept that “the winner takes it all”, they are at the same time fixed at a certain amount. While the former element may discourage more conservative investors to support potential innovators with the necessary financial capital, the latter constraint can also prevent so-called “venture capital” to provide the financial base of such undertakings. That is, the respective lenders are willing to accept the associated high risks probably also because they expect that the potential gains from establishing a new product and enjoying a temporary monopoly status will more than offset potential losses. With an upward constraint in form of a price, the monetary incentives for these risk-affine financiers to lend out money are highly reduced, to the detriment of potential new private engagement in the innovation process.
References:
Stiglitz, J. E. (1996) – Whither Socialism. The Wicksell Lectures. Cambridge, Mass.:
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Praising prizes to induce innovation surely seems like a good idea: it incentivizes people to innovate, the innovator gains recognition, the innovation doesn’t get protected by the law and is therefore available to everybody, etc.
Tough prizes have a lot of advantages, one must not forget that it can’t solve all the issues, and it certainly can’t be the only mechanism used to foster new ideas.
Firstly, although it can be very helpful, I think receiving prizes doesn’t incentivize as much as getting a patent for your innovation. Knowing that you’ll have exclusive rights to exploit your innovation seems to me like a much bigger reward. The money you get with the prize can surely help the innovator, but in most of the industries, the R&D expenses you need to spend to develop this idea is often far greater than the prize money. The prize money would then be a small reward for all the hard work, and company B knowing that company A is investing in R&D could just wait and see what A comes up with and steal this idea after A received the prize. A possible solution would then be to grant larger prize money, but everybody knows that is easier said than done… Another way to make prizes more appealing would be to enhance the recognition and the prestige of those prizes. Gaining such a price could therefore be used as a communication and advertising asset and to reinforce the public image of the innovator/company.
Secondly, another problem is that, although their number is currently increasing, there are not enough prizes to reward all the new ideas. Also, some prizes still remain unclaimed, and are therefore not granted. To solve these problems, the first step should be to communicate more about those prizes so that they don’t remain unclaimed, and then to increase their number in order to foster more new ideas.
Thirdly, prizes can be a good solution in some industries, but not in all of them. Because of the relatively small number of prizes you can get, a lot of industries don’t get attention and their innovation can therefore not be rewarded. In some other cases, the industries are well known, but their innovation can difficultly be rewarded by institutions (example: innovation in tobacco technology, military supplies, etc.). Some could argue that all the innovators should be rewarded, but it is hardly (and understandably) possible with the prizing system.
In conclusion, I think that, although prizes is a powerful tool to encourage new ideas, it can not solve all the problems, and it needs to be coupled with the right amount of patent granting and contracted research to make sure that innovation is always fostered and protected.
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Joseph Stiglitz (Columbia University professor and former World Bank chief economist) made, in 2007, a discussion about a more generalized use of prizes to stimulate and reward innovation.
In the case of patents, the reward for innovation takes the form of a monopoly, preventing competitors from entering the market and introducing a deadweight loss. As you said at the article and as Stiglitz said in his paper, we continue to see more and more signs that the patent system has become unwieldy in recent years. In the search for a better system, offering up-front prizes rewarding successful solutions seems to be more and more convincing.
A McKinsey report arrived at a similar conclusion to Stiglitz’s: that prizes are a “unique and powerful tool,” particularly in the hands of philanthropists looking to incentivize large-scale social change.
In a 2012’s article from Daniel Porter, we can see the two sides of the discussion.
“Though neither large prizes nor patents are a perfect form of incentive for every type of innovation, each serves an important purpose. Stiglitz holds that “we cannot get innovation without paying for it.” But to get the most value for our investment, each strategy, and in some domains a combination of the two, should be considered as we continue to reward the world’s innovators.”
Patents or prizes have both drawbacks. So a system compose of just one of the two are not optimal. We know the bad side of patents. But what about prizes? We can compare the variety of pitfalls of prizes to incentives in the form of patents. These incentives require large up-front costs on the part of the prize sponsors. And so they create an important practical barrier. Many recent prizes were offered by wealthy philanthropists who independently undertook the costs of offering a particular contest. The problem is that’s imply a “picking and choosing” innovation to a select few. That means a government or large organization intervention to decide on distribute prizes for innovation more equitably and thus prohibitively large costs for taxpayers. Another issue could be that prizes could be wrongly rewarded before there is adequate infomation about the success or failure of that invention. But near to theses drawbacks, there is a long list of benefits like those quoted in the article as any deadweight loss and any moral hazard.
Another point that Stiglitz highlight in his paper is a prize-based innovation in a particular sector: medicine. Why ? simply because “pharmaceutical spending heavily favours the first-world and products to make our lives slightly longer and more convenient, while essentially ignoring major health concerns that threaten a near majority of the world’s population.” In fact, prizes have a lot to offer in these types of fields, where there is no incentive to innovate. Prizes stretch our imaginations, and this will always have significant value. On the other hand, offering prizes for the next major innovation also seems given the significant advantages to simply being the first to innovate in many of these domains.
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As mentioned in the article, innovation inducement prizes have been used for decades. The concept of these prizes seems interesting but despite the amounts invested by both public and private sectors, only a few awards were given.
As Liam Brunt (2011) said: ”between 1839 and 1939, 15,032 entrant inventions competed for the prizes and a total of 1,986 awards were made.” (1) This is ridiculous if you compare it with the 2 million of patent application submitted in 2013.(2)
In my opinion, I see two major elements that contribute to explain the lack of interest for inducement prizes. First, the growing individualism leads us to prefer other forms of incentive mechanisms— ownership for patents and sustainability for contracted research. Second, the inadequate design of inducement prizes — and, in a lesser extent the difficulty of the prizes’ organizations to apply it.
As Oscar Wilde said: “Society exists only as a mental concept; in the real world there are only individuals”. And I do really think that the searchers’ self-interest — or the companies’ interest — has an important role in the relatively fast growing patent race.
Notwithstanding a clear deadweight loss, searchers seem to prefer getting exclusive rights, rather than contribute to a better global welfare. We call it individualism and a way can be explored by increasing non-monetary incentives and gains for prizes.
Moreover, I do really think that a tailor-made prize design can break the trend and reveal the inducement prizes. The size of the prizes is a key aspect. Low prizes will not attract sufficient audience; history shows (4) that there are a large number of unclaimed prizes. At the opposite, too high prizes can lead to inefficiencies — too much money spent can lead searchers over the efficient solution. A second aspect of the old-fashion prize is their target. It should be more appropriate only if there is a clear path to a solution and participants have reasonable access to funding.
The idea of the prizes — as of other incentive mechanism of innovation but this can only be achieved through intense competition and market-driven thanks to the engagement of a wide range of actors — in the specific field of the prize. In my opinion, innovation inducement prizes can be seen — in some cases — as complement, rather than substitute to other innovation policy measures. Then, why can we not see prizes, patents and contracted research as a whole?
References :
(1) Brunt, Liam and Lerner, Josh and Nicholas, Tom (2011). Inducement Prizes and Innovation: NHH Dept. of Economics Discussion Paper No. 25/2011. Available at http://dx.doi.org/10.2139/ssrn.1972290
(2) World Intellectual Property Indicators – 2013 Edition, available at http://www.wipo.int/ipstats/en/wipi/
(3) Williams, H. (2012), Innovation Inducement Prizes: Connecting Research to Policy. J. Pol. Anal. Manage., 31: 752–776. Available at http://dx.doi.org/10.1002/pam.21638
(4) Masters, W. A., & Delbecq, B. (2008). Accelerating innovation with prize rewards. History and Typology of Technology Prizes and a New Contest Desgin for Innovation in African Agriculture. Available at http://www.ifpri.org/sites/default/files/publications/ifpridp00835.pdf
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Both patents and prizes seem to have advantages and disavantages wich make the comparison between them difficult.
I will briefly sum up those of the patents before discussing about the rewards. Patents are a real incentive to innovate because they give a protection for the innovator. But they generate a social deadweight loss by limited the number of users and they can be mis-used by some companies in order to jam the competitors.
Concerning the prizes system, it does not create a social deadweight loss because the innovation is directly free for the public and there the social surplus is often bigger than the patent system. Moreover this system can’t be mis-used as the petent one. Despite these advantages the rewards system is not perfect. I will speak about weaknesses of rewards in comparaison with patent and then I will speak about own problems of rewars system.
Firstly, where a patent protect a company and permit it to make some profit on the innovation, a reward doesn’t permit to make benefits wich is quite less interesting.
Secondly, competiting in a contest is risky because the company spend a lot of money to win but at the end only one company will win the reward, all the others will have lost their money and their time. On the contrary, with a patent their is always something to patent at the end and all these effort of innovation are rawarded.
As I already said, the prize system has also some caracteristic problems. The creation of a prize is not easy, it can take a long time, it demands some ressources and it could be quite complicated. After having created a prize, the organisator must be sure that the jury wil be impartial and qualified. The biggest risks are the Bandwagon effect and to be under external pressure.
In conclusion, the reward system resolves some problems of the patent and competiting to a contest could be less interested than wanted to get a patent but this lack of interest is a real default for a system who has to gives incentives to innovate.
Source: McKinsey and Company, 2009
Kevin Starr, Dump the prizes, Stanford social innovation review, 2013
Stiglitz, 2007
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The prize system indeed seems to overcome major limitations in patent system and contracted research, but it also has its own limitations.
First of all, we need to assume that prize has a clearly specified and achievable goal. If it does not, it may fail to attract researchers as they may doubt that the prize could be really won. Also, if the aim is not clearly specified, it may be less likely to achieve significant and useful developments in given field. Secondly, desired outcome should be rather possible to achieve by many entities or individuals than a limited group. If only a few entities are able to achieve it, then probably other method would be more effective as an incentive for them. Moreover, it is very important how expensive the research process is and if it requires specific resources. In a situation where it is difficult or expensive to start and proceed with research, many potential innovators may resign from even starting the process. Also, there is a risk associated with taking part in the competition that someone else will come up with the best solution, making our research useless and all investment lost. This situation is similar to ‘patent race’ wasteful duplication of research efforts discussed in another article on IPdigIT.
However, having in mind all these limitations, I am still excited about the future of prizes as incentives to innovate. I believe that they can be a great tool to speed up important research. It may be used not only by governments, but also by philanthropists and NGOs. Also, as we observe rise of crowdsourcing financing lately, it may be possible in the future to fund prizes based on common need for research with funding provided by individuals rather than large organizations.
It should be noted that positive influence of the prize may be not only through purely financial incentive. Many times prestige and recognition coming after winning the competition might be more important that money itself. Prize can also start development of a new market, as it was the case when SpaceShipOne took the Ansari X PRIZE in 2004. Many investors became interested in this kind of business as a result of the competition. What is more, prize can have broader impact through strengthening the community around specific kind of innovations and promoting good practices.
Prizes are not always the best way to incentivize research, but I believe that they are very interesting tool and that we will hear a lot of news regarding them in coming years.
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Inducement prizes refer to a funding scheme where first a technological, social or scientific challenge is defined and an award promised for the delivered breakthrough solution. The concept of prizes that reward the achieving of a predefined goal in the future is very flexible and effective. That is the most common definition of the inducement prize.
We can say that prize offers an incentive for new researchers or companies to work on a particular area, stimulating innovation and bringing in additional investment. But in a term of scope of these prizes, we will focus on the last sentence.
First, about who can compete for the inducement prize? It is easily to say that each inventors cannot try to achieve the predefined goal. There exist two reasons: We assume that the individual inventor cannot come up with funding to realize their inventions and research and development. Also that most of small ventures cannot take the risks to compete without any warranty of expected payback.
Like most competition prizes, inducement prizes are more oriented to companies than inventors.
Secondly, we have seen that the profile of a target team must either already be working on a relevant solution that requires minimal modification to believe in an expected prize! That means the goals are often a complement of an existing product. As an example, in pharmaceutical market you won’t create a new drug but find an incentive to make it better!
And finally, the question of the additional investment. Sometime the reward is unsufficient to cover the main part of the initial investments. In the other way, the cash prize may help to raise outside fund reducing the barriers to an angel or venture capital type of investment.
These three observations could show us that everyone couldn’t compete for inducement prizes. That leads me to conclude that prizes provide a good incentives for innovate in the most of companies already present in the market but doesn’t change the small unknown inventors’ behavior.
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First, there are at lest four ex-ante problems of prizes.
According to Tirole 2003 , a system of prizes offered by government has four main difficulties:
Coordination. It is the classical problem of free rider problem. Government will face difficulties for financing the system. A worldwide institution should be created for that.
This problems seems to be lest important than the other if we consider the comment cited in the Economist (Aug 5th 2010) “inspired by such successes, governments are now offering prizes. Britain, Canada, Italy, Russia and Norway, in co-operation with the Gates Foundation, are funding the Advanced Market Commitment (AMC) to develop vaccines for neglected diseases in the developing word. the AMC is offering $1,5 billion to drugs firms that can deliver low-priced vaccines for pneumococcal disease, a big killer of children. GlaxoSmithKline plans to deliver such vaccines to Africa next year.”
Commitment. Innovator must be sure that, after the innovation is implemented, they are nor going to be expropriated by the government and that they will be paid the amount of the prize.
Information. Government don’t have the information required for designing the ideal reward (costs for the inventor, ex-ante probability of success, social utility of the invention)
Corruption. There is a risk that innovator collude with the regulator in charge of estimating the prize.
Second, there is an ex-post problem of prizes.
As mentioned in a 2009 report by Mckinsey , one important problem of prizes is measuring their effect and the capacity of response making changes for meeting the expected goal. Only 23 percent of participants in the survey of prize administrators verified the impact of their prizes. It is recommended that sponsors should regularly review prizes by measuring their impact and change them in order to achieve the widespread aim.
Finally, I think that although the system of prizes faces several problems, it seems to be a very good way to spur innovation without reducing consumer welfare as patents do.
Mckinsey 2009 http://www.mckinsey.com/insights/innovation/using_prizes_to_spur_innovation
Tirole 2003 http://www.cae-eco.fr/IMG/pdf/041.pdf
The Economist Aug 5th 2010 http://www.economist.com/node/16740639
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While it is true that prizes seem to overcome the main limitations of patents and government-funded research, at the same time in my opinion they lack something equally important, some kind of “guaranteed knowledge” and/or “qualified interest” from the part of the proposer.
From an ex-post perspective and under the same “conditions” – the same project developed with the incentives of the different systems – prizes seem to fare better than both patents and government-funded research, at least in theory: if the aim has already been selected, prizes are supposed to be the efficient way to reach it.
But what do we know about the prize selection, that is to say the ex-ante mechanism?
For patents the answer is straightforward: patents are “driven” by the companies’ interests, and no cluster of patents is filled in without at least a hint of “efficiency”.
(we cannot refer to single patents, because they could have the aim to only block competitors)
On the other side government-funded research is generally focused on basic research, which should guarantee – somehow – clear aims and objectives.
But what about prizes? How should be regulated the ex-ante moment of the prize selection? Who should specify the money offered, the scope and the prerequisites for the innovation in the specific fields?
It seems obvious to me that from an ex-ante perspective prizes, if widely applied, could really often not have as a rationale the necessary in-depth knowledge of the specific sector to resolve a real efficiency question.
The solution would be to ask “how should a specific sector improve?”, and “in what exactly?” to equally advanced technicians as the ones we expect to participate in the competition, but then as a matter of fact we would already be deeply investing in government-funded research; the alternative would be to have prizes that miss the efficiency aim, and bring attention to fields that, maybe, are not efficient by themselves. [An example could be a prize to reduce the pollution and consumption values of a specific engine, while the “correct” (most efficient) answers to the problem -the ones for which patents will later be filled – are maybe a completely new set of different engines based on different technologies].
In conclusion, in my humble opinion prizes can only be an efficient solution if they are used to foster research in very generic or general ways and fields or in really specific occasions, but they cannot ultimately substitute the two major systems that guide innovation: patents and government-funded research.
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I’m in agreement with the fact that giving prizes is beneficial to encourage innovation and, in many cases, it is preferable to grant a patent. For example, at pharmaceutical industry there is no sense to provide a firm with monopoly power which is harmful to society. The inventor of such vaccine that will be able to save a lot of people has not a profitable aim but the patent system put between the discovery and patients a monetary wall that some of them will not be able to pass. So I agree with those that Joseph E. Stiglitz say (Economic Foundations of Intellectual Property Rights):
“In medicine, patents cost lives. The US patent for turmeric didn’t stimulate research, and restricted access by the Indian poor who actually discovered it hundreds of years ago. (…) These rights were intended to reduce access to generic medicines and they succeeded. (…) Billions of people, who live on $2-3 a day, could no longer afford the drugs they needed. (…) A few scientists beat the human genome project and patented breast cancer genes; so now the cost of testing women for breast cancer is enormous.”
As a general rule, a patent give a revenue to the firm to recover the amount of money that they spent during the research. However, pharmaceutical firms invest more in marketing and advertising than they do on research and the revenue should go into areas of research.
Another market about which I have been thinking is the electric cars market. Nowadays, Chevron owns the patent of electric batteries used by current cars and this company is engaged in every aspect of the oil, gas and geothermal energy industry, it is one of the world’s largest oil companies. This firm is not allowing to produce the new generation of cars only with the purpose of continuing earning huge profits with oil. In this case, the patent system is stopping rivals developing something that would finish with the oil’s problem. Chevron has had the patent since 2001 and therefore many company in this sector had to dismantle their factories because they could not produce this type of engine. If there had been other framework, we could have had cars which would have been more advance and probably would not have used petrol or oil.
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The prize system to encourage innovation seems at first to be a good system. Indeed, there is no deadweight loss because the innovation is directly in the public domain. We might think that the prize system to encourage innovation is a good solution for businesses and for consumers.
However, we quickly realize that this system is often not an ideal system for businesses. The prize system prevents the company that discovered the innovation to implement monopolist strategy. The prize offered for the innovation must compensate for this loss for the company. We observe in the fact that it is rarely the case. Indeed, the available information is not perfect. It is therefore almost impossible to predict in advance how the innovation will bring a business.
The benefits of innovation depend on the market. Market reactions are predictable difficult thing. In addition, future earnings also depend heavily on strategic choices of the company. Two companies with the same starting conditions (same market, even innovations, etc) but with different strategies will not get the same results.
A second limitation of this system is who must support these prizes. Often, it is the states that pay for these prizes. Once made innovation, innovation is available to everyone. We may wonder if this is really the role of a state to fund that.
In conclusion, the prize system is far from perfect and suffers from several limitations. I think that this system is a good complement to the other two conventional systems (secret and patent). This system allows for example to fund innovations that would not be profitable for businesses but are useful to society. For example, many pharmaceutical companies fund research for common diseases because common diseases represent the largest market. Almost no companies fund research against rare diseases because it is not profitable. The system would be useful to fund research for rare diseases effectively.
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As mentioned in the blog, prizes are becoming an important tool used extensively by Governments to promote R&D. Although they do overcome some of the issues of using patents and contracted research, they have drawbacks of their own which are highlighted here.
Firstly, setting the right amount of prize is a very subjective decision. Low prize amount may not provide enough motivation for R&D in that particular area while high prize amount may result in many people running for same prize which may lead to duplication of work.
Secondly, the process of choosing the project for awarding a prize can also be biased. Government and public institutions may choose a prize for a particular project in a field which the general public may find irrelevant. In this case, spending taxpayers money to fund prizes can have negative consequences and may lead to discontentment among public. One example here can be prize for a space mission. The public may not agree with giving away money for achieving success there.
Lastly, scientists and researchers may start holding on to their results of a particular project until a prize is announced. This can start a trend where dependency on prize money increases too much and fair research work is hindered.
Even with all these drawbacks, prizes are definitely a good way to promote innovation specially for projects concerning public welfare where incentive is not much to innovate.
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In Europe, economic growth had to be induced by innovation due to our lack of compititiveness, but it is extremely difficult to obtain. A myriad of author address the question of how to accelerate and guide innovation as best as possible. In this comment, I will discuss about
prizes. It consists to reward whoever succeeds in meeting prize criteria.
After some research, I could say that there are four main categories of innovations. For each of these categories, we can match its typical funding mechanism.
First, there are direct funding (ex-ante payments) by private firms. Second, there are direct funding (ex-ante payments) by government or philanthropic donors. Third, there are research contests (Prize funding or ex-post payments) by private firms. Finally, there are prize contests (ex-post payments) funded by public or philanthropic donors.
Also, the advantage of direct funding is that funders could observe quality of research and develpment before results are known while prize funding do not allow to funders to observe quality of research and development unless results are seen.
Further, private funders lead to a easier value capture. Therefore, beneficiaries could be made to pay while public or philanthropic funders lead to costly value capture. So, benefits are spread to consumers and imitators.
To conclude, as far as I’m concerned, I would say that the best way would be to set up incremental prize. Indeed, it could allow to follow the innovation all along its development.
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As mentioned in the article, inducement prizes appear a better tool than patents and contracted research as they perform better on two fronts: eliminating deadweight loss and any moral hazards that may arise. However we must finely try to understand a few aspects that need to be considered before jumping to the conclusion that inducement prizes are a better tool than patents and contracted research in every scenario.
Firstly, there is the issue of setting a prize money amount for solving a particular problem. In either case, an amount which inadequately compensates the efforts of the winner in terms of time, money or an amount which overcompensates the winner would put someone at a disadvantage. Determining the correct amount would be quite a task in itself since the problem statements are generally open ended and there could be several approaches to cracking the problem.
Secondly, can money really act as an inducement for innovation in all scenarios? To consider example of several prominent researchers working in pure sciences, they have given up the option of pursuing high paying jobs to pursue research in a subject they are extremely passionate about. No amount of money could persuade them to deviate from their own path to solve a problem however pressing and relevant it may be. A devoted researcher would perhaps like to get the Nobel Prize/Fields Medal over a million dollars any day. This puts in doubt the amount and quality of audience an inducement prize would attract.
Thirdly, hordes of people attracted to solve a particular problem means they are foregoing working on another subject where their contributions could have been more valuable. In the end a lot of effort would be wasted and this is what we commonly understand as the duplication of effort. This is something that would be present even in case of contracted research and patents but would be magnified in case of inducement prizes.
Once the above concerns are carefully considered, it may be prudent to take the approach of setting up an inducement prize.
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The innovation process faces some problems related with the incentives and potential gains of this activity. As we know, Innovation is highly linked with the knowledge production, where we can understand it (knowledge) as a non-rival and non-appropriable good. In other words, it is a good for which the consumption of each individual leads non subtractions from any other consumption of that good. For this reason, the production of Knowledge generates spillovers. This spillovers are the source of divergence between the ideal investment in research and the actual investment in this activities. Here, the patents, contracted research and prizes could help to reduce this gap. We have seen the drawbacks for the patents (deadweight loss) and contracted research (moral hazard), then the prizes could be a good options to give the right incentives, however it have some other problems. In the following paragraph, I analyze the main problem regarding the ex post rewards.
The prizes or ex post rewards innovations avoid the problem of deadweight loss and moral hazard because the gains of innovation are not distributed by the market but by an institution or government. Then, a key difference between this systems is related with the question: Who is assigning the gains of innovation? In some sense, the market is governing the distribution of profits in the patent and contracted research systems, while the ex post rewards require something like a “central planner” to assign the rewards. If this “central planner” or institution, who is assigning the rewards, has perfect and complete information then the payment for the innovation will be well designed, in order to cover all costs and efforts required by the innovator. But in the real world, the institutions do not have perfect information, so the rewards could not cover all the costs and efforts to produce the innovation. Then this failure implies a loss of incentives to innovate.
As we observe, all the systems have advantages and potential problems. The challenge for the policy designer is to choose the best system depending on the special characteristics of the innovation and the market related to it. That means ex post rewards are not always the best solution to avoid the problems generated by the other systems. It has its own issues to be solved.
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Inducement prizes provide alternative opportunities to develop innovative solutions to challenges by offering a financial reward for completing a specific technological challenge.
It is true that, from a first impression, inducement prizes seem to overcome the main limitations of patents (dead weight loss) and contracted research (moral hazard), which are both other ways to stimulate innovation.
However, in my opinion, inducement prizes do have some drawbacks too. As a matter of fact, the first person or company that provides a feasible solution to the problem will be rewarded by a considerable financial prize. But, what for the other people or companies, that have worked so long and invested a lot of time and money in the same project, but for nothing? This is a wasteful duplication of energy and research effort, on the same project. During the time when the non-rewarded people were doing these researches, they could have searched on something else that would have grown the global knowledge and produced other innovations.
Besides, this could be discouraging, because if you’re not 100% sure you will be the first to succeed, you don’t get into the project. And for knowing you exact position in a research in comparison to other firms, it is very difficult, because of a lack of information.
Furthermore, the fact than the objectives of the search are so pre-defined, and that there is a very specific challenge to tackle, that can lead to a “narrow search” of innovation. I mean, if the objectives are so precisely defined, nobody will spend time to go out of the box and look after unexpected innovations, which could be even better than the forecasted ones.
After having said this, I must admit there are a lot more positive aspects for these inducement prizes. First, they bring fresh ideas on the problem. Indeed, a same team working on a single project will maybe not find the solution, because it has its nose on it. It is sometimes rewarding, to have another look on the project, to find a new way to work and maybe some new solutions.
Moreover, these prizes are a way to arouse interest in fields that have been maybe less explored for now. It will be an interesting way to create interest in a particular issue, that otherwise will be never studied. In addition to this, they also stimulate the interest of the general public that will be informed of these innovations.
Furthermore, they help to attract new innovators to the field, by mobilizing more investment from private organisms to research.
In conclusion, as for everything, there are drawbacks in inducement prizes. However, I think there are a lot more advantages. Nevertheless, everything should not be rewarded by those prizes. Obviously, innovation that can lead to wrongdoing for Society (nuclear bomb, something extremely environmental unfriendly…) should, in my opinion, not be supported by organisms and not be rewarded. One cannot forget ethics, what world would it be if there was a prize race for the most powerful and dangerous chemical, or other?
Source:
Digital Agenda for Europe. (2014). Inducement prizes. Online http://ec.europa.eu/digital-agenda/en/inducement-prizes, consulted on the 10th of November 2014
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Inducement prizes may resolve some issues linked to patents and government-funded research, but this technique to foster innovation is not faultless. Indeed, one of the problems with inducement prizes is the criteria you put in order to obtain the prize. I can imagine that the European Commission has set some standards the company has to meet in order to claim the prize. But because these prizes are often used with technologies that are not really well-known now, it is difficult to assess what the future will bring. Thus, couldn’t it be possible that a company finds a solution to the problem but does not meet all the criteria set by the European Commission? What would happen in this case?
“Inducement Prizes allow the European Commission to drive innovation in specific areas of research in an effective but flexible way” (1). This quote reflects that this technique could be really interesting in certain areas of research but further analysis of Inducement Prizes show that it cannot always been used in each sector. The European Commission states for instance that the “ICT sector – being dynamic, fast-moving and attractive to many of this century’s best innovators – is well positioned to make fruitful use of the Inducement Prizes instrument” (1).
Kalil (2006) stated in Williams (2012) (2) says prizes are applicable in 5 different areas: NASA pursue prizes for Earth-Moon solar sailcraft and a lunar lander-rover, technologies relevant to African agriculture, AMC for vaccines needed in low-income countries, zero-energy buildings, methods of reducing urban greenhouse gas emissions, and fuel-efficient cars and technologies such as software for early reading, math, and science software for middle schools, and software for introductory college courses in math and science.
Williams (2012) (2) adds that choosing a prize topic requires a lot of research and analysis with experts, affected parties and categories of potential participants. Some discoveries may often have a high social value that no prize sponsor will have thought of in advance. Indeed, the technology discovered could not be known at the time the prize was announced (2).
Another issue that we could raise is the amount of the prize. “If the size of the prize is set too low, it may fail to spur research. If the size of the prize is set too high, sponsors may overpay relative to what was needed in order to spur the development of the technology” (2).
To conclude we can say that inducement prizes can be a good way to foster innovation in a more or less fair environment but we have to bear in mind that it cannot be used in every sector. This is because it is “unable to stimulate research on serendipitous scientific discoveries” (2). As such, it complicates using prizes in basic, fundamental scientific research. Kalil (2006) stated in Williams (2012) adds “innovation inducement prizes will not work in long-term, fundamental research, because it is often impossible to specify the goal in advance” (2).
Sources:
(1) European Commission: http://ec.europa.eu/digital-agenda/en/inducement-prizes
(2) Williams, H. (2012) Innovation Inducement Prizes: connecting research to policy, Journal of Policy Analysis and Management, Vol. 00, No. 0, 1–25, URL: http://economics.mit.edu/files/7823
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According to me, prizes are one among a lot of other good ways to promote innovation. We cannot overlook its beneficial contributions for the society used since years by the authorities in order to resolve important problems. Furthermore the deadweight loss will be redistributed straight to the consumer.
However, giving prizes is not the miracle solution to boost innovation and sadly include some defects which lead to an inefficiency. Let’s take a simple example where an attracting prize is offered for an innovation. Inventors and managers will strive to discover it, thus on the one hand, it will be quickly discovered but on the other hand people unfortunately will compete among themselves. As a consequence, we will have a huge investment in financial, human and time resources from different firms aiming at a same goal but they will do it separately in order to avoid spying. Wouldn’t they be much more efficient if they had worked together, sharing their knowledge, information, relations … ? A proper solution would be to switch from an individual reward, to a collective reward. Thereby, cooperation and sharing of information would be crucial. Obviously, one firms may think “I’ll let my competitors do and get the benefit without spending one euro”, but if we inventory every firms that have brought a substantial contribution, this cluster would get the rewards.
As a conclusion, I’d say that giving prizes is important to spur innovation but has a serious disadvantage, i.e. a waste of investment of all the others firms that weren’t the first to get the innovation.
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As commented above, a priori, prizes and rewards seem to be close to a first-best solution provided these avoid the main drawback of the patent mechanism. That is, patents generate a deadweight loss resulting from allocating monopoly power to knowledge, therefore delaying the effect of innovation in consumer welfare. Meanwhile, prizes and rewards remove the latter and enhance static efficiency while may theoretically equally spur innovation by setting an optimal monetary return to innovators.
Yet, theoretical developments on prizes and rewards outline that there is a necessary condition for these to foster innovation as patents do. The actor offering the prize must have enough information to quantify the social value of an innovation and must be able to properly assess the monopoly profits derived from it. In a setting where public authorities substitute patents for prizes, the Government needs to information to set prizes consistent with an optimal innovation output.
Even assuming those public authorities can assess the social welfare derived from an innovation, empirical and theoretical research stands point out that in most sectors patents are used as a coordination device rather than a mean to solve the ‘appropriability problem’ (which, by the way, would explain the patent explosion in recent decades). In this respect, patents are used to help technology trading among firms, to signal reputation (for instance, indicating that a firm is competent) or as devices to ease collaboration.
Despite Julien Penin argues that prizes and rewards don’t accomplish the ‘coordination device’ of patents, I believe that that is not the case. Prizes and rewards are equally signals of firms’ competence and are a clear indicator of firms’ innovation output. Moreover, technology trading does not seem to be as necessary as in the case of patents if we assume prizes forwarded by public authorities –and directly put to the public domain. Following McKinsey Quarterly’s “Using prizes to spur innovation”, prizes can be effective if three conditions hold: a clear, measurable and achievable objective; a relatively large set of potential problem solvers; and participants’ willingness to bear risk.
Altogether, it seems clear that prizes and rewards are a better alternative if (1) there is enough information to assess the social benefits of innovation and if (2) we are in front of a sector where patents are found to work equally as prize and rewards do in terms of coordination devices. Of course, the first condition is a strong assumption. Yet, going back to the very first idea, the deadweight loss derived from using patents is rather a major issue. Deadweight loss is usually measured as decreased consumer, material welfare in terms of prices, choice and quality. However, in some scenarios, the deadweight loss can be critical and away from just material welfare; for instance, in the pharmaceutical sector.
Considering the ideas in the previous paragraph, I believe that an efficient setting is one in which patents are generally used to spur innovation -provided public authorities’ inability to assess the social welfare of knowledge. However, in some cases (such as in the pharmaceutical industry or some specific developments of the sector), patents generate a huge deadweight loss even worse than the outcome of the main limitation of rewards and prizes (derived from the information problem). In these cases, patents should be replaced.
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Prizes indeed have been around here for quite a while, as long as three centuries back. And while it is true, that their numbers have been on the rise recently, the objective behind these has also changed significantly from before. Prizes are nowadays being given for specific problems and are more and more being funded by private players. While, on the surface they appear as a good means of spurring innovation, there are certain points which must be taken into consideration before we can comment on their usefulness for the same.
For the most part, prizes serve as a good way of attracting people’s attention towards a problem, and possibly giving research a new avenue to explore. They are also a good way to crowd-source ideas.
For true researchers or scientists however, prizes especially the ones like the X prize may not be that attractive. For one, the prize money offered is usually less than the amount they incur. Secondly, for most of them, prize money is not even a driver. The question that then arises is that how can prizes spur innovation. The answer to that lies in the fact that they can be used to build awareness and excitement about the topic in general. Competitions such as Ashoka’s Changemakers competitions have aptly displayed this and made use of prizes to encourage collaboration by keeping prize money intentionally low.
Also, to judge the effectiveness of prizes, it must also be seen how well have the prizes succeeded in bringing the innovation out for public use. Commercial aviation, for instance came long after the Orteig Prize. A lot of competitors competing for these prizes are not even mainstream industry players. X Prize Fuel Efficiency challenge for example has no major car manufacturer competing and it is conceivable that the results will take a long time to get incorporated into public use. Judged by this parameter, it seems that traditional R&D approaches might actually serve our purpose better.
Thirdly, prizes by themselves may not be suitable for all kinds of problems and industries. They work best when they are able to capture imagination of lots of people and pose a difficult yet achievable task. For other problems, they would not serve the purpose well.
Overall, to sum it up, I feel that prizes are good for capturing public attention towards certain social challenges and problems and would be especially useful if they can spur more collaboration and a greater crowd sourcing of ideas. They certainly will not work well with all spheres of problems and have to be designed in an effective manner to ensure their success. However, they are a good means for building up excitement and public awareness towards certain social problems, and to a certain extent even sparking healthy public debate and possibly a change in human behaviors.
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As most of my peers, I think that prizes are a good way to promote innovation. As said in the McKinsey report, it has been used since a very long time by autorities to solve problems for the society. As explained in the main article, it would apparently solve the problem of the deadweight loss and the ethical issues of the governement-funded researches.
Nevertheless, there is still an “efficiency” problem that the Prize system cannot solve. It seems clear that, under an public offer of competition (let’s call it the “Challenge”) with an attracting reward for the winner, people will of course … compete. And we will have a huge amount of brilliant people doing the exact same research, each in their corner. This is a huge waste of resources because they would be probably more efficient if they shared their knowledge, findings and experience. Maybe it would be more interesting for the autority to offer a reward that will be benefit all the actors involved in the Challenge. For example, if the Challenge is about “designing a model of electrical car to replace fuel-based engines”, then autorities sponsoring this should propose as a reward, for example, a tax reduction for 5 years in the automobile industry. This solution should give more incentives to the actors to cooperate and so deliver the innovation with more efficiency.
Competition can provide some incentives to deliver better solutions but we could also ensure the same level of quality (by defining clearly the target to win the Prize).
In conclusion, I would say that Prizes can be a very nice way to promote innovation. The drawback is the wasteful duplication of the same research by a huge number of competitors. A solution may be to offer a reward that everyone could benefit from. If such a reward can be offered, then actors will have strong incentives to cooperate together to reach the target objective in the Challenge and unlock the Prize for them.
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We can ask ourselves if prizes should substitute patents? Because we hear that patents impose a monopoly deadweight loss. Indeed inducement prizes could be able to combine the advantages of the patent system and the free-access-to-knowledge system (no deadweigth loss).However, there are some issues.
You need to know the cost of the coming invention, but the rewards agency doesn’t even know who will be the author of the invention. Indeed, there are a lot of potential ones. Then, you need to know what will be the demand. Moreover, the goal in order to win, have to better known.
But this system has been used for bringing new ideas, products, investment and induce innovation. Inducement prizes may become an interesting way as it doesn’t lead to a deadweight loss like the patents.
Another point is that prizes could bring money and recognition. Money is of course important for the companies. With that, they could use this money for other projects or put it in actual ones. Recognition is also good for the companies, as their clients could think that they are great.
In conclusion, although prizes do not have the disadvantages of monopoly deadweight loss, I think it can only be a complement for the patents and contracted research for inducing innovation efforts. But finally, I think that a mix of those policies could be a good idea.
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Innovation inducement prizes seem to be an efficient incentive mechanism to enhance innovation. Moreover, in comparison with two other mechanisms, patents and contracts, they are more efficient by attracting more individuals and informal teams than patents. Indeed, the latter attracts more scientists or researchers for instance. However, although innovation inducement prizes seem to be more efficient in many ways, this comment will aim at investigating two cases in which they may not be appropriate and the difficulties that they can meet.
First of all, innovation inducement prizes take the form of a contest, which affect the flow of information and the participation.
Regarding to the flow of information, due to the competitive aspect, participants can inhibit the exchange of information between them in order to make sure that they will be the first one to discover the innovation and win the prize. Hopefully, this limitation occurs only through the duration of the contest.
As far as the participation is concerned, it may be inhibited due to the insufficient funds to participate in the competition. As a consequence, this means that only a subset of the pretenders to the prize will actually enter in the competition, while letting the others aside.
Secondly, even if prizes are better suited to attract more different kind of participants than patent or contracted research, this has as a drawback that they may not be as suitable as patents and contract in increasing the basis scientific knowledge and the engineering understanding. Indeed, in the case of a patent, there is always a clear and detailed description of the innovation in a patent which helps to understand the knowledge behind the concept presented. In contrast, this detailed description isn’t always present in the innovation inducement prize. Due to the fact that prizes don’t focus on the increase of basic scientific knowledge, they may have less impact on educating and training the next generation of researchers.
To conclude, two limitations of innovation inducement prizes have been presented: the hurdle to information exchanges and the lack of impact on scientific knowledge. There may of course be others. Thus, even if these prizes have many unquestionable advantages, we have to remain conscious that they have some drawbacks and that we can’t choose this option eye-blinded.
Sources:
Thomas Kalil, Prizes for Technological Innovation, The Brookings Institution, December 2006 at http://www.brookings.edu/views/papers/200612kalil.pdf.
Innovation Inducement Prizes at the National Science Foundation (2007)
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To examine where ‘prizes’ differ from ‘patents’, we need to look into the fundamentals of these two types of rewarding mechanisms. There are broadly four parameters under which we can review them: – Participation (who takes part in R&D), Risk (investment and insurance), Rewards (exclusivity & price), and Reach (diffusion).
Prizes, unlike contractual agreements, are similar to patents in terms of Participation as it allows the invention to take place from the diverse pool of knowledge resources spread across the world. Risk is also similar as there is no guaranteed payback in both if the investment doesn’t lead to fruitful outcomes. The two major points of difference occur in terms of Rewards and Reach.
Let’s look at Rewards first. For patents, the rewards in terms of years of exclusivity is fixed but the price to be charged to the consumer is a pure monopoly price – to maximize the inventor’s profits. On the other hand, for prizes, although there is a reward, but its magnitude remains at the discretion of the prize distributor and that may or may not be satisfactorily enough for the inventor considering their R&D efforts. So when would prizes be not enough to incentivize inventions under this context? The simple answer would be when there is information gap between the prize distributor and the inventor i.e. the inventor has little to no knowledge of the potential benefits vis-à-vis the effort put in for the innovation. Eg;- Defence propelling research, Space exploratory research etc.. These get encouraged only if there is an incentive of production/ sales exclusivity (via patents) or if it is contractually sponsored (eg;- govt. funded) to minimize risks.
Now let’s examine Reach. In a developing country like India, widespread usage of any critical cure medical invention is given primary importance. This does little to incentivize pharma biggies to put in the effort as they would not be allowed to charge monopoly prices for sales within the country. The only rewarding mechanism that may work in this context is Prizes (although less likely, unless it is sufficiently large enough). But looking at the same thing from a developed country’s perspective, where the purchasing power and medical insurance network can support the high cure prices, Prizes won’t work in incentivizing a pharmaceutical company to develop a cure for something like “Ebola” or “Swine Flu”. The only viable reward here would be “Exclusivity to market/sell” via patents.
To sum it up, ‘prizes’ differ from ‘patents’ under two contexts – 1) Rewards – when there is Information gap between prize distributor and inventor on potential benefits vis-à-vis effort required & 2) Reach – policies in the country forcing the usage of certain inventions.
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I would have loved to support the idea of prizes as I see it as a “good” way to induce innovation. “Good” because of the deadweight loss given back to consumers, there is material benefits for the winner but also knowledge benefits for society as we can see in the Erwin Plein Nemmers Prize in Economics (https://www.ipdigit.eu/2014/11/to-induce-innovation-should-we-praise-the-prizes/). I think it is a fantastic solution to induce innovation, award it and induce again innovation by implying more people (in universities for example) in the innovation awarded. This prize is a good example to illustrate an efficient application of prizes.
But the question here is mainly to be critical; we have already discussed the political part (there is indeed a question on objectivity and interventionism), also talked about ethics which is a very huge question (as I said for another blog article, innovation relies also on being responsible of the impact of it, be careful with the potential consequences). I would like to discuss the situation as a factor for the level of efficiency.
So we agreed all to say that it is a good idea to award big innovation with prizes to motivate the potential innovators. But I think that the final impact of this incentive depends on the situation of the company or the innovator.
Let’s talk about the companies first. A prize could bring two major benefits: money and recognition. Money is always interesting for a company to invest in its current activities or in other projects. But the recognition is especially important for young firms. If we consider a mature company with a monopoly (or taken for), then the prizes will probably not encourage innovation as the benefits are too limited. In such a situation, the company would turn itself to patients and then we lose the advantage for the consumers. In bad times of a company, prizes could be an interesting option to its survival but will they invest in R&D and challenge innovation as a winning discovery is quiet unlikely?
If we consider a lonely innovator (not so lonely but with his/her little team), I feel like prizes are more widely interesting. It is really useful for a starter (money to go further on their work and recognition to find support around him/her), when they went further and present a new innovative project, it is again easier for them to go even further. In tough times, I think (I insist on the fact that it is maybe a fantasy that I have build in my mind) that they are passionates and prize is then a hope for them to fulfill their ambitions. Another case to consider is a lonely innovator becoming a firm: we go back to the company point.
To sum up, my idea is that the age and the situation of the innovation producer influences the attraction for prizes and their impact in inducing innovation.
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Indeed innovation inducement prizes have problems on their own. First of all, the goal that has to be achieved in order to win have to be the more precise possible. The result have to be objectively observable, and not subjectively, like we can find in literature prizes (where each judge will have a different opinion on whether the book is good or not). If it is not the case , this could lead to some issues ruining the reputation of the organism who set up the prize.
And speaking about that, designing the prize is also something really important and I think, tricky. Because if it’s not correctly designed , this could lead to doing more harm than good to society/economy, by depreciating the trust of the stakeholders, displacing efforts and spending too much resources on the administration of the prize. It also have to be coherent with the cost of research to solve the issue (a 1000 dollar prize for a 50000 dollars research or a Million dollar prize for a 10000 dollars research would be ridiculous.)
There is also, as you state it in the question, some type of researches that will not be appropriate for this kind of inducement strategy. As I found during my researches about the subject: “Prize are appropriate if there is a clear path to a solution and potential solvers has reasonable access to funding.” (Shah, no year precised) Indeed there is some cases where it would be too expensive to conduct research for the solution of the “prized” problems, and where the only people or organisms who have the monetary resources to do it, won’t be interested by the prize, because in comparison of what they already have, it will be derisory. I cannot find a concrete example, but I think that it would also be inappropriate in some fields where there is not enough people having sufficient knowledge in order to solve the problem. Because if there is not enough people competiting to be the first one to find, it will maybe not be motivating enough and the one participating will not invest themselves sufficiently, and maybe even give up.
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First, in order to make the subject clear how does inducement prizes work? According to the official European Commission’s website (http://ec.europa.eu/digital-agenda/en/inducement-prizes), inducement prizes works as a strategic and useful tool to drive the innovation in specific areas. The principle is the following: governments or private parties offer rewards for challenges that haven’t not YET been achieved. The solution of solving the problem is left to the participants and the first team which comes up with a feasible means to solve it up obtains most of time a sizable financial prize. This system has been used for centuries now and its purpose is clear : bringing new ideas, new investment and induce innovation. Inducement prizes may become an interesting innovation policy measure as it doesn’t lead to a deadweight loss in opposite of the patents. Indeed, patents bring a DWL associated with the temporary monopoly that comes with it. But inducement prizes has its own drawbacks as well.
In fact, one of the biggest difficulty in the IP system is to set a cost and a value of a prize system. If the costs incurred by the contestants are way more important that the reward they get to obtain in case of “winning”, then the prize will attract to little investments and to little participants. In the contrary, if the prize rewarded is too large then some problem about duplication efforts will appear. It’s not easy to determine the fair value of a prize depending on the cost it will involve. This is one of the reason why in some cases of technological progress, we would rather prefer to use a patent or some other policies than innovation inducement prizes.
Indeed, IP (inducement prizes) is not appropriated in every area of technology and social progress. According to the McKinsey and Company report, there are some stage questions (three) to know when to use this system. The first one is about the goal, is it a clear achievable goal? It should answer yes to this. The second question is how many solvers are there? If the broad of participants is large, you can consider to use the inducement prizes. Participants will be part of a competition to be the first solver of the problem and therefore obtains the reputation, the pride to be the winner in addition to the prize. The last question is are the participants willing to accept outcome the risk? The characteristic of inducement prizes is that the solvers need to mobilize their own resources: money, materials, time… Without the promise to be the first to get a feasible solution. There is still a risk of duplication of efforts. Definitely, the IP is interesting to use when the goal is measurable and clear for all solvers and when it attracts a large public aware of the risk in order to participate to the contest. In other cases, patents or fees may be the most appropriate innovation policies measures.
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The comparison between rewards and patent is not an easy exercise.
In one hand the rewards system seems to be more attractive thanks to it allows to establish a specific goal without being prescriptive. The main reason why reward seems better is because there is no deadweight loss. Indeed, in this system, the innovation pass immediately into the public domain and so, the social surplus seems higher than in the patent system.
But to be true, the amount of the reward needs to be at the level of the social value of the innovation. To estimate this social value, which is different in each kind of innovation, perfect information is required.
There are three main problems related to this lack of social value’s estimation.
Firstly, you need to know the cost of the future invention, but the rewards agency doesn’t even know who will be the inventor because there is a large number of potential ones.
Secondly, you need to estimate what will be the demand for the future invention.
The third unknown value is the related risk of the innovation. Nothing proves that it will success certainly.
I mentioned above the biggest problem of rewards, but I believe that if the market of the unsolved problem (which is the reward’s project) is sufficiently known and the expected social value is sufficiently accurate, the reward regime is preferred to the patent one thanks to the fact that the innovation is directly into the public domain.
In practice, we saw examples which permit some radical changes in our society and high level discoveries which solved big problems as well as health problem.
On the contrary, there were also some negative experiences with rewards. Indeed, sometimes when the goal is not well defined, there is the possibility of a commitment risk. This is when the rewards’ agency changes its choice and claims its reward back once the invention is created because it’s not exactly what they were looking for. For example, in 1914 when John Harrison did not receive the promised Longitude Act price to find a way to determine the longitude coordinates.
Finally, there are some more disadvantages of rewards that I did not mentioned above as well as an economic distortion due to the fact that tax need to be raised to compensate the given reward. The last main negative aspect about rewards that I found in my research is a coordination one. Indeed, if the asked innovation is in the purpose of solving a worldwide problem, there is a problem to define which government/rewards’ agency is/are in the best position to raise the funds for this global public good.
In conclusion, I do believe that even if reward has some disadvantages, it permits to do some very important discoveries which change our daily life. For example, food cans where found thanks to a reward to solve a problem of conservation for the army, the Orteig Prize alloys the first nonstop flight,…
In my opinion, prizes are not “bad” for society and to promote innovation. Because the perfect solution doesn’t exist, I think that the right balance between each kind of investment for innovation needs to be found. It will result in an equilibrium between tax and social welfare while continuing to develop innovations and R&D.
References used :
http://press.princeton.edu/chapters/s9221.pdf
http://www.cairn.info/zen.php?ID_ARTICLE=RPVE_454_0023
http://www.researchgate.net/publication/222432001_Patents_versus_ex_post_rewards_A_new_look/links/0deec51b5e6a1a9df3000000
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Prizes may be categorised as the long-term ones, and the immediate, short-term ones. There are issues with both sets which will be explored below.
Long term prizes, like the Nobel, are typically awarded many years after the innovation or discovery takes place. The fundamental issue lies in the fact that as these are awarded after many years, they cannot act as an immediate motivation for pursuing research. The monetary aspect of these awards comes many years after the research was pursued, making it off secondary importance. Often times, only the honour associated with being a recipient is the motivation for pursuing research to win the award. Yet another issue with these awards lie in them being bestowed on recipients who are in the twilight of their research careers, such that, winning the award may not spur the recipient to redouble efforts towards new innovations. When such awards do recognise innovations, they may simultaneously recognise successful applications of the innovation, which results in the award being shared, reducing the monetary recompense afforded to the innovator. Finally, long term awards take time to recognise innovations in newer fields, as these need to be peer reviewed, and the long term benefits need to be demonstrated, before the award is made.
On the other side, the immediate, short term awards address some of these issues, but pose some of their own. These awards, usually directed towards achieving a well-defined target, like the H-prize or the Longitude Award, may not necessarily lead to innovation in basic sciences per se, as there is a time constraint associated with these awards. This limits the scope of innovation that these awards can act as a motivator to. Further, much like the patent race, there is often a duplication of research, which is wasteful and cannot be avoided.
Thus, it is clear the there are drawbacks of having prizes as the motivation for innovation too.
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Alternatively to patents and government funds (contracted research), innovation activities may be fostered by innovation inducement prizes. McKinsey and Company (2009) present a model in order to decide when prizes are an effective instrument to stimulate activities to achieve a desired social benefit. Within this model prizes are compared to other type of grants including effort-based grants, investments and fees (McKinsey and Company, 2009). This model is shortly discussed below and linked to the idea of innovation.
First a key question which needs to be addressed is if an innovation objective can be clearly defined in advance (McKinsey and Company, 2009). Take for example the Longtitudeprize 2014 project. 10 million pounds for ‘a cheap, accurate, rapid and easy-to-use point of care test kit for bacterial infections’ (Longitudeprize, 2014). Winning criteria were developed in summer 2014 and from November 2014 projects can be handed in which should solve the problem of our increasing resistance against antibiotics.
What is more, it needs to be clarified how many potential solvers exist for the problem (McKinsey and Company, 2009). From an economic perspective, prizes are worth considering if there is a big amount of participants in the challenge for the specific prize. While this not only increases the amount of perspectives and ideas, strong competition may also be a greater motivation to win the prize and come up with the best innovation.
Last but not least, participants who are willing to take on the inherent risk in prize awards need to be attracted (McKinsey and Company, 2009). Although 10 million pounds may seem like a reasonable argument to take on risk, it is not that people just buy a ticket in the lottery and have the chance to win. Some innovation projects may need considerable amount of time and investments up front in order to achieve an outcome which then has the chance of winning the prize. Therefore, I believe a balance between risk and reward needs to exist or be created if innovation should truly be stimulated by prizes.
To further reflect on the aforementioned points and compare prizes to patents and government involvement, one thing I would like to mention is the argument of risk. As noted in the discussion, Moral Hazard is a problem occurring if government supports R&D efforts and engages in contracted research. While prizes do not lead to Moral Hazard, I think it is also important to consider them from a risk taking perspective. From this point, I believe that it is important to see whether the innovation would be crucial for long-term goals of a welfare society and how much investment it may potentially need. In all cases needed prior R&D investments are expected to be very high and a key problem of society to be solved, I think governments should financially support innovation efforts in order to provide necessary starting capital and take over some of the risk inherent in these efforts. Otherwise, too high risk may outweigh the benefit of a financial reward, prestige and other motivators to engage in prize awards.
One other thing I see is that patents can stimulate innovation that no other one has ever thought of, while prizes are limited to stimulate solutions for known and defined problems. Still, reviewing a positive link of prizes and innovation found by Liam Brunt et al. 2008, the participation in an award may increase the amount of new patents as participants may discover new things in the process of finding solutions (Mc Kinsey and Company, 2009).
To conclude, although prizes do not inherit the disadvantages of monopoly deadweight loss and Moral Hazard, I believe they can only be regarded as an addition to patents and contracted research for inducing innovation efforts. In any case, a combination of these instruments may also be worth considering in order to stimulate innovation in a more holistic approach.
Sources:
McKinsey and Company (2009). “And the winner is…” Capturing the promise of philanthropic prizes.
Liam Brunt, Josh Lerner and Tom Nicholas (2008), “Inducement Prizes and Innovation”, Working Paper (Center for Economic Policy Research)
Longitudeprize (2014). Viewed on November 11, http://www.longitudeprize.org/challenge/antibiotics
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An innovation policy based on inducement prizes seems to be very promising. Indeed inducement prizes could be able to combine the advantages of the patent system (innovators get rewarded) and the free-access-to-knowledge system (no deadweigth loss). However, the number of innovation which are due to this mechanism compared to the total amount of today’s innovation is tiny. How is that possible?
My personnal opinion is that the limited use of inducement prizes can be explained by many pitfalls which are linked to this policy. Let me explains some of them :
1. Inducement prizes is very costly
In 2013, the amount spend by belgians firms in R&D was 5,66 billions euro (Belspo). If the inducement prizes policy was applied in every case, the Belgian government should provide that huge amount of money. The problem is that every taxation system used to fund this policy bring about distorsions in individual’s initial behaviors. At the end, the inducement prizes policy indirectly creates some deadweight loss (as the patent system did).
Furthermore, we can easily imagine how costly the administration set up to manage those inducement prizes will be. Indeed this administration would be in charge of defining the social needs, evaluating how much money should be paid for every single innovation and assessing the prizes. This is a lot of work!
2. Practical difficulties
First it is very difficult to assess what are the needs of society. It is also hard to decide how to formulate an objectif. Let’s take an example. If the U.S. federal government has offered a prize in 1879 to improve the current candle of that time, Edison’s first bulb would not have won. In contrast, expressing broad goals such as “an innovation that will enhace the quality of life of american citizens” will discourage innovators. Indeed, their incomes depend on the unpredicable mood of some experts as the definition of the goal is very broad
Deciding how much should be awarded to the winner of a given prize is also quiet tricky. History show us that many prizes have never been awarded because of a lack of applicants (Master & Delbecq 2008). This means that the rewards was too small to attract innovators’s attention. On the other hand, overgenerous prizes will divert too many innovators from others useful projects.
3. Innovation is more than inventions
According to Holmes, Levine and Schmitz (“What spurs innovations”September 2008) innovation is far from being a seamless, trouble free process. Firms invest ressources in R&D because it will give them an advantagage on their competitors. Patenting their innovations will make them able to charge (temporary) monopoly prices. As their profit is higher to the cost of implementing the innovation, firms have a clear incentive to do so.
This incentive is less clear in the case of inducement prizes. Indeed the monopoly-profit doesn’t exist anymore (everyone can get a free access to the innovation and use it) while the cost of implementing the innovation remains the same. As a consenquence, it could be better for all firms of a given sector to decide to not implement the innovation at all.
Those few examples illustrates how imperfect the inducement prizes system is. Those points should be considered carefully while comparing this sytems with others (like patents).
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The relationship between innovation and prize system could be traced for several centuries. Prize was used to be successful stimulate innovation actions by using financial rewards without honor. As the result, the path to induce innovation become secret, partiality and leading some corruption. In order to get rewards, scientists will balk at being forced to research some topic toward a prize question without their own interested. This was not only limited research topics and innovate thoughts, but also made prize system become less prominent.
One of the problems of prize system is administration. If rewards are too high, then resource cost will be duplicate and exacerbate. If rewards are too low, it will not cover the cost of innovation. There is a way to reverse this situation is to all the social value and reputation reward into the prize system. Non-pecuniary prizes avoid the complex process of linking the magnitude of the prize to the value of a particular technology and inventors are still able to appropriate by winning. This way was largely used by numerous organizations and government system. For example, in the “Guidance on the Use of Challenges and Prizes to Promote Open Government ” of US, America’s government will not provide the financial support from larger enterprises and social institutions, but also “Authority to Provide Non-Monetary Support to Prize Competitions” such as public education , outreach , so they could giving the prize competition without providing funds.
After amend the process and reward function, nowadays, prizing become more effective and plays a main role in innovation. Prize could be effective in creating innovation competition and exploiting flexible solutions through the problems set in prize after amending. There are several types of prizes paths could be normally found on society.
(1) Exemplar prizes, in order to define excellence within an area.
(2) Point solution prizes aim to reward and spur development of solutions for a particular, well-defined problem.
(3) Exposition prizes help identify and promote a broad range of promising ideas. It is facilitating further development of the idea or practice by third parties.
(4) Market stimulation prizes are trying to jumpstart the development of a new industry, and also solve the potential market failure.
There is a common idea that innovation prizes are not a substitute to other innovation policy but they are complementary relationship. Patent provides incentives to inventors to invest in useful areas as they could get proprietary price from their innovation, they could market their patent their patented products to cover research cost. However, patent is aiming protect technical information while prize is better to facilitated the diffusion of this information. Prize could be worked efficient if there is a specific problem need to be solve and there are many potential solving ways at the same time. Prizes and patents may simultaneously generate incentives for innovation.
Reference:
1Shoud Prize Replace Patents? A Critique of The Medical Innovation Prize Act of 2005 http://www.bu.edu/law/central/jd/organizations/journals/scitech/volume131/documents/Wei_WEB.pdf
2,Guidance on the Use of Challenges and Prizes to Promote Open Government
http://www.whitehouse.gov/sites/default/files/omb/assets/memoranda_2010/m10-11.pdf
3,http://www.nesta.org.uk/sites/default/files/impact_of_innovation_inducement_prizes.pdf
4,http://www.hbs.edu/faculty/Publication%20Files/11-118_089bff4b-868a-41f1-8f3d-351d1a58d2c2.pdf
5,http://www.mckinsey.com/insights/innovation/using_prizes_to_spur_innovation
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First of all I think it is necessary to differentiate between categories of innovations, because what is true for a sector might not be true for another one. Thus, a deep knowledge of the subject we want to regulate is essential in order to achieve the best possible outcome.
One clear distinction could be made between the kind of innovations which is likely to assure big revenues to the investor and the ones that instead are usually going to bring small returns in terms of money. The latter might in same cases be a carrier for glory, or widely international recognitions in term of honor, but we all know that to convince an investor these kind of awards might not be sufficient.
Another clear cut could be made comparing the types of innovation goals which, if reached, would represent a significative step forward in the quality of life of the people, and the ones that instead serve only private and specialized sectors. Both are important, but again, the former may not be seen as a good investment, since it could be difficult to maintain the exclusivity over the research’s outcome.
In comparing the systems so far used to encourage innovation, then, this sort of differentiation must be taken into account.
Patents, contracted research and prizes to innovation all have strong and weak points, depending of both the subject in which they apply and the innovators characteristics themselves, but we are going to focus just on what are the peculiarities of prizes.
First of all, they do not represent a novelty. As the article points out, there are plenty of examples of prizes to innovation in the recent and distant past. The Nobel Prize itself could be seen as a form of prize to innovation, even if the goals for each category are not specified in advance.
As stated in a recent McKinsey study, the use of prizes by philanthropies and private businesses to encourage innovation and achieve social benefits is burgeoning. Indeed, in the past decade itself the total amount of prizes over 100.000 $ has more than tripled. The same study suggest that not only the size of the prizes to innovation growing, but also their number and variety, this being a prove of the effectiveness of the practice, especially in areas such as new technologies ,and science in general. The number of prizes connected to achievements in humanitarian and arts objective has decreased though, nowadays representing only a small percentage of the total.
More in depth, we can see that some conditions have to be met to make a prize effective: the goal has to be clear, and measurable (also, it should be possible to achieve it in a determined amount of time); a wide set of subject should be capable and interested in solving the problem; and last, but not least, the predisposition of the innovators to bear some risks (i.e. invest themselves into the innovation).
While prizes might then represent a good alternative to others philanthropic instruments, there are some structural limits that deserve to be taken into account when trying to make a compaction between prizes and the patent system.
The first thing I noticed, reading the article, is that they not solve the overlapping problem between subjects working on the same issue. And while it is easy to accept it as a side effect of competition, it become harder to justify it after a government’s intervention.
Some critics point out that effective prizes could impose an enormous increase of costs on taxpayers, when provided by the State. According to some studies, the cost of securing FDA approval for a new drug could varies between $500 and $800 million itself, without even consider the R&D costs.
Others say that prizes tend to be focused on conceptual research rather than on carrying concrete and usable technologies to market. Also, especially in those sectors in which innovations is a non-stop cycle, a prize system just incentivates the subject to struggle for innovation until the moment it is awarded, creating a dangerous and unproductive lack of willingness to innovate.
Another reasonable critic to the prize incentives is represented by the fact that, usually, when a prize is offered for the reaching of some objective, once the goal is achieved the subject offering the prize become the “owner” and “responsible”of the innovation, therefore leaving researchers and inventors not accountable for the result of their research, or inventions. One case in which this situation could turn extremely dangerous is again the pharmaceutical industry: if an industry is developing a drug by itself, it would put great attention in every single phase of the process, knowing that it will face the responsibility for whatever unpredicted outcome. If instead the government, through a prize, become the holder of some scientific innovation that’s fundamental to develop a drug, and share the information in the public interest, it may become nearly impossible to determine who is responsible for any kind of problem possibly occurred down the road.
That being said, I personally think that prizes could not represent an effective alternative to the patent system, but instead they have to be considered as a smart and useful form of philanthropy.
http://en.wikipedia.org/wiki/Prizes_as_an_alternative_to_patents
http://www.theglobalipcenter.com/sites/default/files/reports/documents/Prizes__Patent_Pools.pdf
http://www.mckinsey.com/insights/innovation/using_prizes_to_spur_innovation
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Prize inducement or ICP (Inducement Prize Contest) is a controversial instrument, which involves a competition that grants some cash and recognition to innovative companies for their accomplishment of facing a set of technological challenge. Some research defines the IPC as an effective push in the innovation, while others claims it is a waste of time, entertaining the people in the sector.
We can name few well-known competitions as Longitude Prize, Global Security Challenge, Orteig Prize, …
Innovation is important, but we need to protect it. There is three different ways to secure innovation:
– Patents. But implies monopoly deadweight loss.
– Contracted research: allows to stop relying on market forces. The Authorities can fund R&D. But raises moral hazard problem.
– Innovation inducement prize (awards, …), one of the oldest policy measure to solve pressing societal problems and idiosyncratic technical challenges (McKinsey and Company 2009 report).
The prize inducement is often a controversial subject. There are many advantages and disadvantages. Let’s start with the negative impacts it implies.
First of all, it acknowledges that competitions may not always be the best way to fund organisation, and I agree that they’re an imperfect substitute for real market force.
Secondly, people tend to idealise innovation without regards to implementation. The fact is, implementation is hard; it’s very difficult to put in place. One tends to jump into innovative ideas thinking if they have an idea, it will be revolutionary but tend to forget about all the execution process.
Thirdly, entrepreneurs are not aware how much time they waste for applying in these competitions they will, probably, not win and the people organizing these contest encourage them without knowing what they are wasting. The first years to establish company are the most important! Moreover, most of the time, it’s not worth it: small price, improbable, …
Regarding, the positive impacts, here are a few important facts we need to keep in mind.
First, it overcome limitations of patents (do not entail any DWL as no exclusive rights are granted and innovation immediately free of access) and contracted research (do not raise moral hazard issues as the initiative and the decisions remain with the innovators themselves)
Then, prize competitions are democratic, merit-based opportunities to receive funding. Most of the innovative companies will fail due to lack of financial support in the early stage, which harm in the end the society and what they could benefit. Also, if the contests are big enough, they can grab the headlines and raise notoriety on the company (e.g. the Gates Foundation toilet prize).
Finally, these awards will draw out excellent initiatives out there, things that the sector would not have normally seen or heard about. Prizes and awards help get excellent ideas out into the world.
Therefore, in my opinion and taking the arguments above into consideration, I believe that prize inducement is a good instrument to induce innovation.
As mention, these contest are democratic and based on the innovator’s quality to be fund, some many failed from lack of funds, it is a social good.
Although, a review on the awards should be done (they should make application process easier and quicker) and the grand seeker should think if it worth it.
In addition, contest should make public the number of applicants, number of awards given, final and other important data. Rarely is all this information are available, it is difficult to evaluate without it. And finally, applications should receive thoughtful feedback to improve.
Besides, nobody forces innovators to join in, if participants focus their effort and wouldn’t believe they would make it, then they wouldn’t participate.
Finally, Imagine what could bring the innovation to the world? The social impact it would imply, and how it would affects millions of people! Risk worth taking!
http://www.ssireview.org/blog/entry/dump_the_emstupid_prizes_em_multiply_the_rest
http://www.ssireview.org/blog/entry/dump_the_prizes
http://ec.europa.eu/digital-agenda/en/inducement-prizes
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Because of the importance of the patent system in the management of intellectual property in today’s world and because of the lack of clear evidence on the effect of prizes on innovation, the following comment will base most of its rationale on a comparison between the patent system and prizes.
Firstly, prizes could never be the only system used to support innovation. They are a “one-shot” system that could be complementary to the patent system at best. As said in a previous comment, prizes work well only if there is a clear goal to reach (McKinsey and Company, 2009). Despite the recent proliferation of prizes, it still does not come close to the sheer amount of patents filled and granted even when we discount the numbers due to patent race. One argument in favor of prizes is that they are supposed to answer an immediate need determined by either the government or a private firm. If we assume that the authorities giving the price did a fair and clear assessment of the problem to be solved and concluded that money was to be spent on such a problematic, the innovation should at least be useful and used. The same cannot be said for every single patent not only filled but, unfortunately enough, granted.
Secondly, the main argument for prizes is dynamic efficiency. Since they fall immediately into the public domain, society as a whole can benefit from the innovation avoiding the loss of dynamic efficiency associated with patents for example. No monopoly is formed and the technology is used and diffused at a lower price which produces more consumer surplus than in the case where a monopoly arises due to a patent. Another argument is that some prizes due to the highly complex problem proposed ask game changing solutions, pushing technological boundaries a little bit further and redefining what can be done in a field. Such prizes are a drop in the ocean but their effect on innovation cannot be minimized.
And finally, the very nature of a prize where “the winner takes it all” gives a formidable incentive to innovate. Not only to innovate because only the winner reaps the benefits of prize but to innovate fast. If the innovator does not move fast enough and takes too much time to develop its innovation, he could be beaten by a faster innovator that presents a more “complete” solution to the problem. One of my colleague argued that the fact that only the winner receives credit would discourage potential innovators to give it another try. I do not agree with such a statement. First of all, the patent system by giving a monopoly to the “first to file” is even worse in that aspect. Second of all, firms that compete for a prize will not invest all their resources in such a hazardous venture. Finally, the fact that it falls into the public domain allows innovators, if their design was truly innovative, to improve the design of the winner and to patent it, making everyone happy.
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Prizes, although seem very convenient in solving the problem of patents, have their own limitations. Prizes , according to me, work best in case of motivating when the main attraction is fame, rather than the actual monetary benefits. The best examples are that of sports and acts of daredevilry, where the competitors are primarily motivated by the fame that is on offer, and also the costs involved are not so high. On the contrary, research requires considerable investment in achieving the necessary results, and the money offered might not be sufficient to compensate for all the costs. Moreover, given the nature of research that happens these days, which are more a culmination of efforts of a team rather than a single person working, prizes might not seem that attractive.
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Prizes are a worldwide reward given to an individual or a firm for the best innovation in a field. Prizes get the innovator a great recognition of his work.
Prizes are thus a good thing to induce innovation but there are still several difficulties related to prizes.
First of all, contestants to prize invest a lot on R&D and work hours and hours to their innovation. Once the prize is given, the winner gets all the recognition, the renown related to prize, etc. But what about the other contestants ? I think that we don’t hear from them, from their work and so on. They might be discouraged and they shouldn’t have money anymore in order to reinvest in other innovation.
Second, I think that the jury may be not completely impartial in its decision. Most definitely are but big firms might use lobbying with few jury in order to win. Also large firms are most likely to win because they are already well known in the entire world compared to small new one with little budget.
Third, M. Wey says that « One of the fundamental problems with a prize system as a patent alternative is that the government does not have enough information about how a prize system compares with the patent system » (Wey, 2007). Indeed, patent and prize system don’t have the same characteristics (the costs are not the same for example) and the same mechanisms. So governments might have difficulties to replace a patent system by a prize one.
Finally, I think that prize system still induce innovation more than patent system. For example, Berkeley Law exposed the question about replacing a patent system by a prize system in order to encourage the creation of new drugs to help the Health Crisis in the Developing World.
Sources :
Wey, M., (2007), « Should prizes replace patents? A critique of the medical innovation prize act of 2005 » in BUJ Sci. & Tech. L., vol. 13, 25.
http://www.law.berkeley.edu/10425.htm
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Although the prize system has lots of advantages, it can also be seen from a negative point of view.
First of all, creating a prize system is complicated and sufficient resources are needed. To develop a such system, this can take more than a year. (McKinsey and Company, 2009)
Secondly, there can be some issues with the jury. The first issue is that they may be unqualified or bad-informed. Furthermore they can be tempted to reward the best-known organization. According to Kevin Starr, “there is a Bandwagon effect, the more prizes you get, the more prizes you get.” (Kevin Starr, Dump the prizes, Stanford social innovation review, 2013) The second issue is that they can also do some favoritism or be under political or industrial pressure. The specification of the rules could have been manipulated for instance or some companies can invest some resources to influence the jury. (Wei, 2007)
Thirdly, according to Stiglitz, a prize system only works for domains “in which needs are well known […] allowing cleat goals to be set in advance”. But it will be useless, on the contrary of the patent system, for domains in which needs are not well recognized. (Stiglitz, 2007) The McKinsey report adds that prizes only fit when there is an “achievable” and “clear goal” and when there are many solvers. In other cases, grants or fees suit better. (McKinsey and Company, 2009) The report also explains another limit to the prize system. It is said that if the sponsor has to “understand how much effort and investment is required” otherwise the prize fails. (McKinsey and Company, 2009)
In this last part of my comment, I conclude with the difficulties inflicted to companies by the prize system. Firstly, the patent has the benefit to protect the company which has invested a lot of resources in R&D. On the contrary of a firm owning a patent, the firm which has won a prize does not gain a monopoly and thus cannot charge prices above its cost in order to recover its investment. (Stiglitz, 2007)
In addition, while the firm owning a patent is the only one allowed to sell its product, the firms participating to a prize contest see their product going into the public domain. Thus, they lose incentives to spend money on the commercialisation and the marketing of their product. (Wei, 2007)
Then, the last argument against the prize system is the risk carried by the firms competing for the prize. They spend thousand hours working on the contest but in the end, the prize is only given to the firms which succeed and which match with the criteria of the contest. If they do not succeed, they get no prize and thus they have wasted thousand hours. (McKinsey and Company, 2009)
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After reading the article an incremental question came to my mind whether should prizes substitute patents? Because we hear so much about that patents impose a monopoly deadweight loss – because patent system rewards patent owners when they can market their patented products to customers who can pay significant rents that cover the cost of research, development, and marketing – so its efficiency is questionable. To decrease that high prices that are emerged thanks to the monopoly situation, some suggestions have already drawn up: as buyouts of patents the government should pay at least the monopoly profits that the patent holder would expect to receive or offer a cash subsidy to consumers who value the patented product more than the marginal cost but cannot afford the patented product at a monopoly price.
But is it efficient again to let the government to intervene to such an extent to the economic processes? On the one hand I can say yes, because in that way it can use prize systems to signal the importance of certain problems (lack of investment in R&D for the public good) and an ideal prize system should distribute rewards based on the social value of the innovation. But on the other hand a fundamental problem with a prize system as a patent alternative could be that governments do not have enough information about how a prize system compares with the patent system. They do not know how much to spend on the prize system overall and how much to value and award individual innovations. If the prize is too low, then the system will inadequately stimulate R&D investment. If the prize is too high, then costs such as resource duplication and favoritism will be exacerbated.
According to the former paragraph patents could be relatively more efficient than prizes, since first private investors will have better information about the market for the innovation (and about their own capabilities) than the government and secondly prizes were becoming increasingly a matter of money, not honor. Altough the Nobel Prize is a modern example of honorific prizes that reward outstanding achievement retrospectively, but is not designed to create ex ante incentives for research.
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In the recent years the use of prizes is highly increased. I, definitely, believe that it can be a good and valid alternative to patents and a way to incentive innovation as well. The us of patents is usually strictly intertwined with innovations that have a market value, which is not necessarily a bad thing but does not create incentive to innovate in markets where profits are overshadowed and with them the possibility of finding a solution for global problems; with a prize oriented system, for example, we can go as far as saying that it creates incentives to innovate in medical field with new vaccines or medical cures. As Joseph E. Stiglitz pointed out http://www.project-syndicate.org/commentary/prizes–not-patents patents are based on a system that reduces the use of knowledge while on the other hand prizes could tackle the lack of incentives given by a patent system and, most importantly, they would provide immediate and affordable insights without having the burden to wait for a patent expiration. Furthermore we can say that the patent system is based on a temporary monopoly, since whoever owns the patent is the only one that can use it, while a system of prizes relies more on a competitive market; obviously knowledge is affordable for everyone right away with higher and better direct incentives.
Inducement prizes offer rewards for challenges that have not yet been achieved compared to recognition prizes (they award a work that has already been completed). This can certainly offer greater incentives to work in different areas of research and bring additional investments in such fields.
With that being said there are some critics of the prize system and, even if I prefer this logic to the patent system, I can see why they could not work for every sector. Prizes sometimes are limited by their size; what does that mean? Basically, in order to being able to substitute patents and try to create innovation and new products, prizes require huge costs which for the most part are going to be dumped on taxpayers. If we are talking, for instance, of medical treatment, some researches show that the cost of a FDA approval could get up to 500$-800$ million http://en.wikipedia.org/wiki/Prizes_as_an_alternative_to_patents. Another critic is that since prizes are limited they do not create incentives for continuous improvements and innovations; they are once in a lifetime achievement kind of deal.
We can see that prizes work more effectively in sectors like the medical one, where the type of innovation and the resources needed have to be directed in order to find more efficient uses while creating something that can reach as many people as possible maybe with a possibility of reducing the cost in order to have a more affordable product for everyone. This won’t be the case, I believe, for a sector like the IT where innovations are continuous and every little invention can be patented.
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There is a need for an incredible amount of innovation and development to sustain the needs and rate of growth of society today. To this end, various means such as patents, contracted research, and prizes are used to incentivise the process.
Patents help organisations reap the benefits of the time, effort, and money put into research, over a sustained period of time. However, they also have a destructive effect by means of long expensive counter productive litigation issues they raise, apart from the monopoly deadweight loss caused. Contracted research has the problem of moral hazard that may not allow for an innovation to be used as intended.
Prizes seem to solve both of these difficulties by allowing the research to be in the hands of the innovator and subsequently, remain public after developed. The recognition and fame they offer would also be sought after by independent researchers who may not be bothered by the economic profits that could be generated from the innovation. Governments can also target these prizes towards the most relevant pressing issues and hope to attain solutions quickly. After the work becomes public, organisations and individuals can build upon the research or borrow from it to make additional contributions thus reducing duplication of effort.
Prizes however also pose their own set of problems. They may not be relevant for research in cases where the prize money cannot compensate its actual economic value i.e, when the benefits of patenting the product are greater. It seems like prizes should be aimed toward fundamental research, which can be built upon further and which are not ends in themselves. By making such fundamental research suited for prizes, they can be made public and thus, duplication avoided. Organisations can borrow from this public information and build unique products, which can perhaps then be patented. Another limitation is that prizes tend to be categorized and directed, and thus, more narrow in their consideration of what is necessary and relevant to the time.
In conclusion, prizes do solve some of the disadvantages posed by other means of promoting innovation, but they cannot be applied to all forms of research. A combination of these different means is necessary to ensure desired results.
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Prizes have traditionally been one of the important mechanisms to encourage innovation. One of the earliest documented examples is from the 18th century, when a prize was offered to anyone who could generate soda alkali from salt. This resulted in the development of the process that is being used till date. Prizes have been used extensively in multiple industries such as the automobile industry, where it has been recognized as having played a prominent role in the development of the first automobile.
The use of prizes to encourage innovation has its own drawbacks.
Firstly, though it no doubt provides a reward to succesful innovators, the reward is usually offered only on completion and succesful demonstration of the objective for which the award was created. It usually does not have a provision that would provide the innovators with up-front cash flow that would allow them to meet their initial expenses. Though the same would apply for patents as well, contracted research or Government sponsered R&D allows the innovator to meet his initial expenses. In this regards, prizes may not be suitable for industries where initial R&D is extremely expensive, much beyond the means of average inventors. For example, X Prize for developing a low cost and reusable manned spaceflight, consisted of a prize amount of $10 million. However, almost $100 million was spent by the winner of the prize for developing the technology.
Secondly, there are usually multiple groups that are competing for the award, which may result in duplication of efforts. Ultimately, only one of the innovators would receive the prize, and thus, the efforts of the other innovators would be a loss to the society.
The next disadvantage of prizes is with regards to the actual success of the innovation. It may not be feasible for the prize giving authority to actually test the innovation and ensure it’s success before awarding the prize. This may also result in a situation where the prize giving authority may take a substantially long time before finally concluding that there is no winner. These delays, and an inability to test for success may hamper the objective of the prize. This may be appicable in case of extremely complex and technical innovations.
Government sponsored prizes may not be succesful in encouraging innovation due to multiple reasons, such as the potential inability of the Government to pay the prize amount in the future owing to budget cuts, change of Government etc, and the fact that the intellectual property rights may not rest with the competitor and may vest with the Government.
Thus, prizes, just as all other mechanisms of encouraging innovation, have their own set of drawbacks and hence, must be used cautiously and after due analysis of the pros and cons.
Sources :
Advantages and Disadvantages of Prizes in a Portfolio of Financial Incentives for Space Activities – Molly K. Macauley
http://www.mckinsey.com/insights/innovation/using_prizes_to_spur_innovation
http://en.wikipedia.org/wiki/Ansari_X_Prize
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There is a long history of setting the prize to induce innovation,the most famous example is the Nobel Prize which established by the Swedish inventor Alfred Nobel in 1985.Undoubtedly,prizes have great incentives for innovation.Because the most important incentive is not the money but being recognized by peers.Jonathan R Cole and Stephen Cole proposed that social identity can encourage scientists to engage in research continually in their book 《social stratification in science》in 1973.R K Merton also said that acknowledging is the currency of the realm of science.There are many categories of recognition,such as reference,award,the position of academic community and honorary title.Compares with other categories,prizes have the enormous influence on the academic community,to some extent,highest prize can make scientists become famous overnight.That is why the prize is the most desired incentive for scientists.
However,this does not mean that the innovation inducement prize is the best incentive mechanism for innovation.Compared with prizes,patents can bring the sustainable earnings,although its may cause deadweight loss.And in legal aspect,patents have stronger protective effect than prizes.That is because the majority of prizes are established by personal to honour leaders in certain fields of science.It cannot protect the right of innovators as thorough as patents,even if the prize established by government.So for interests-driven companies,patents are still the good choice,but for private innovators,prizes seem to have more incentives than patents.
Moving to the aspect of government-funded research,admittedly,it may raises the moral hazard,but compares with prizes,it can provide more complete research facilities and sustainable capital support.Prizes just give a large bounty to innovators and sometimes the bounty is not used for continuous research but for innovators’ private use.According to the survey,more than half of Nobel laureates use the bounty for private purposes,only a few of them use the money for research.So over the short-term,prizes do not raise any moral hazard issues and motivate scientists to push for new research,but in the long run,contracted seems to be more purposeful and more conductive to research.
Taking the case of the Nobel Prize,it is the supreme prize for science and technology in the world.It undoubtedly is the greatest incentive for every scientist,but it does not mean that it is perfect,it still has some problems.Firstly,there are always created some controversy.The Nobel Prize was selected by adjudicators,so sometimes adjudicators might make some mistakes in bonus items and prizewinners.For example,Einstein was awarded the Nobel Prize for his contribution to Quantum Theory in 1921,but it is commonly believed that the theory of relativity was the greatest achievement of him.Another example is Selman Abraham Waksman,he won the prize because of discovering the streptomycin.However it is illegal,because the American court judged that A.Schatz was the common discoverer two years ago.Secondly,the Nobel Prize lacks direction.Because it covers wide area in physics,chemistry,physiology,literature and so on,so it may cannot motivate the innovator focusing on the urgent aspect in social technology.That the reason why there are many prizes have been set up to encourage scientists to study the certain field,such as the H-Prize,X-Prize and Longitude Prize.However,these prizes do not have such influence as the Nobel Prize,although some of them have more bonus than the Nobel Prize.It is like I mentioned above,international identity is more important than the amount of money.
All in all,there is no perfect solution to encourage and protect the innovation in the same time.In terms of incentives,innovation inducement prizes seem to be the better way to induce innovation.So I think prizes should be praised,but we also need patents and contracted research to do something that prizes cannot do.
Reference：
http://en.wikipedia.org/wiki/Nobel_Prize#Nobel_Foundation
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Prizes are considered as a very interesting alternative to the traditional legal system of patent. Indeed, the latter is not always sufficient to stimulate innovation and increase the supply of new technologies. The article presents clearly that patent suffers from criticisms concerning in particular the deadweight loss which it engenders, the moral hazard that must be dealt with and the brake in the static efficiency, but also many more gaps. However, it is necessary to keep in mind that Prizes , like any mechanism, is debatable because of some weaknesses. I should like to single out three aspects of this.
Firstly, a problem settles concerning the aim of Prizes. We can assume that these rewards were not established in the unique purpose to favor innovation itself but rather to promote innovations which will be “useful” for society, regards new technologies which are really going to propose a new way to fill a need on the market. In other words, it seems important to operate the distinction enters, on one hand, the innovator A who, although his invention is maybe very brilliant and ingenious, was not up to the end of the process by making sure that his technology can be put into practice and meet the needs of consumers by becoming accessible and usable on the market. On the other hand, the innovator B who maybe doesn’t have an invention of a technicality as impressive as A, but in opposition to the latter, he knew how to go at the end of the mechanism by concentrating on the technical feasibility and the accessibility of its idea on the market to individual’s largest number. To summarize, an invention can be technically remarkable but not viable from a commercial point of view, while an other one can seem technically less spectacular while having a more important trade potential. Therefore, if Prizes focus only on idea itself, it doesn’t necessarily allow to reward the innovator who managed to solve the aimed technological problem. For exemple, domains where the problem doesn’t come from technical gaps but from the fact that technologies don’t manage to reach the market for concerns of distribution. The question of the access to “clean energies” illustrate the idea because if we want to promote the access to these energies for the largest number, the relevant innovation is the one that manages to find a mechanism to propagate the technology worldwide more than the one that concentrates on the need to make the existing technologies even cleaner without taking into account the factor of accessibility.
Secondly, a problem also settles concerning the area of Prizes incentive mechanism . The fact of awarding a monetary reward at a given moment doesn’t incite the innovator to pursue searches in a continuous and intense way in order to improve the technological capacities of the innovation. On the contrary, once prices are awarded and the money is on the pocket, the inventor can then consider that costs associated to the fact of persevering for a potential improvement of the invention exceed the earnings removed of the stubbornness from perfection. It is consequently possible that new possibilities are not exploited due to the lack of incentives.
Lastly, Prizes can produce kind “of pernicious effects” on research incentives by directing the searchers to focus on radical innovation and to abandon the innovation of break or the incremental innovation. In other words, efforts are going to be concentrate on how to create new products which are not present in the market or even sometimes answering no existing problem. Conversely, the intention will not be focused on present products on the market to widen their possibilities of use, increase their performances, simplify them or make them more competitive by reducing their costs. In the field of medicine for example, there will be fewer incentives to find new uses for already existing vital medications.
To conclude, the aim of Prizes, it scope and potential “indirect” effects establish my three main criticisms sent to this system, in order to compare with traditional incentives system weaknesses in the field of intellectual property.
Sources :
http://www.theglobalipcenter.com/sites/default/files/reports/documents/Prizes__Patent_Pools.pdf
https://www.mediaterre.org/afrique/actu,20150603104506.html
https://fr.wikipedia.org/wiki/Innovation
Show lessInteresting thoughts. The next step is to think how to combine prizes and patents so as to take the best of the two mechanisms.