Inducement Prizes and Innovation

by Liam Brunt, Josh Lerner & Tom Nicholas

Overview — Throughout recent history, many foundations have tried to induce innovation through competition, offering massive cash prizes to inventors who meet the challenge of creating world-changing inventions. For instance, in 1996 the X Prize Foundation offered $10 million to the first non-government organization to launch a reusable, suborbital manned spacecraft twice within two weeks. The prize was awarded in 2004 to a project financed by Microsoft co-founder Paul Allen. The problem is that inventors cannot win these competitions if they cannot come up with funding to realize their inventions, and research and development costs often exceed the amount of the cash prize. So, does the incentive of an eventual prize really induce innovation? In this paper, Liam Brunt, Josh Lerner, and Tom Nicholas look to answer that question, using a data set of prizes awarded by the Royal Agricultural Society of England (RASE) between 1839 and 1939. Key concepts include:

  • The RASE competitions led to an uptick in the number of new patents awarded in any given year, indicating that offering prizes is good for overall innovation.
  • However, based on the number of contest entries in the hundred-year period, the researchers find that inventors seemed more motivated by the possibility of winning medals than in winning cash prizes.
  • The findings offer guidance for current invention competitions. While the biggest competitions presuppose that inventors are fueled by the possibility of cash prizes, the evidence suggests that they are more fueled by the possibility of publicity--and the idea that winning will make it easier to market the prize-winning product.

Author Abstract

We examine the effect of prizes on innovation using data on awards for technological development offered by the Royal Agricultural Society of England at annual competitions between 1839 and 1939. We find large effects of the prizes on competitive entry and the quality of contemporaneous patents, especially when prize categories were set by a strict rotation scheme, thereby mitigating the potentially confounding effect that they targeted only "hot" technology sectors. The prizes encouraged competition and medals were particularly effective. The boost to innovation we observe can only be partly explained by the re-direction of existing inventive activity.

Paper Information