Prize above patents?

IP is only one policy to incentise innovation.  Other popular ways include patronage (e.g. government or private funding of research) and, the subject of this post, prizes. Innovation prizes (a.k. inducement prizes) offer another means to encourage investment in innovation and to reward innovators for the fruits of their efforts.

Champagne, champagne for troops!

Prizes were more popular in the past, when governments and private organisations used them to encourage innovation in particular areas.  Our modern food preservation systems stem from an innovation prize.  In 1795, Napoleon offered 12,000 francs for a food preservation method that could be used to feed his armies.  Nicolas Appert, a Parisian confectioner and distiller, invented a solution which involved boiling food in closed champagne bottles.  Now, eight out of ten cats say their owners prefer tinned, as opposed to corked, food.

In the UK, Parliament offered a prize in 1714 to solve a major problem in maritime navigation.  The Longitude prize offered inventors of a means to calculate a ship's longitude up to £20,000.  The solution was essentially a clock which kept London time and allowed navigators to calculate longitude from there.  The innovation reduced shipwrecks and spurred subsequent innovation.

More recently, the United States has made moves to allow government departments to fund similar prizes. As part of the 2009 Strategy for American Innovation, the US government called for its agencies to use prizes as a means to encourage innovation. In the UK, Nesta (a.k.a. as the National Endowment for Science, Technology and the Arts) launched the Centre for Challenge Prizes in April 2012.

How do prizes compare to IP as an incentive to innovate?  On the plus side, they potentially reduce the costs of litigation associated with IP infringement.  Additionally, prizes are less likely to incumber subsequent or cumulative innovations as the prize-winning innovation should be freely available.  If the winning innovation is unrestricted by rights holders, it is less likely to block further innovation and the free flow of information may lead to innovation elsewhere.  The lack of monopoly rights over the innovation also reduces the deadweight loss associated with IP. However, on the negative side, the competition associated with prizes will almost certainly encourage duplication of efforts.  Yet this duplication of efforts is also seen in patent races.

Won't get out of bed for less than £10M

Another challenge is the implementation of such prizes.  Sponsors of such prizes may have incomplete information about the innovations which could lead to poor prize design.  The prize money itself is also difficult to determine as the risk is that the prize will over or under reward successful innovators.  One way to mitigate this is allow prize winners to chose between prize money or a patent.  If the prize money is less than value of the innovation to the winner, then the winner will chose the patent.

This wouldn't be a Katonomics post without a look at what the evidence suggests.  In one of those really-cool-pieces-of-research-you-wish-you'd-thought-of, Liam Brunt, Josh Lerner, and Tom Nicholas, look at a century of prize competitions by the Royal Agriculture Society of England.  They find that winners of the awards went on to patent more and, interestingly, competitors who did not win also went on to patent more.  This suggests that the prize system encourages wider innovation than just the competition-specific innovation. They also find that the prestige of the prize was often more important than the cash prizes.   Another key point is that such prizes can encourage significant investment in R&D.  The X-Prize for space flight had an award of USD$10M but generated over USD$100M in investment.

While innovation prizes are unlikely to replace the IP system, they could serve as a complement to existing incentives to innovate.  And as we know, the IPKat has used a similar method to solicit innovation on the part of readers.