The government and the private sector each play a central role in furthering U.S. innovation. Private sector firms account for about two-thirds of research and development, helping to introduce new products that benefit consumers, increase productivity, and raise standards of living. Innovations that benefit society, however, and that may have only limited commercial value relative to investment have been fostered primarily by a government system that relies heavily on grants and contracts—and in limited amounts relative to societal needs.
Greater amounts of prize-based government investment in research and development could reap considerable rewards, particularly in the areas of space exploration, global agriculture, vaccines for diseases that afflict the poor, energy and climate change, and educational technologies. The prizes, which would be awarded only for successful results, could be drawn from existing budgets and new budget obligations and could spur private investment beyond the award itself.
Science, technology, and innovation are essential to America's continued economic growth, and can help achieve a wide range of national and global policy objectives. One currently underutilized tool for stimulating technological innovation is inducement prizes, which encourage efforts by contestants to accomplish a particular goal. A related policy instrument is an Advanced Market Commitment, under which governments commit to buy a given quantity of a product or service that meets prespecified performance goals.
This paper proposes expanding the US government's use of prizes and AMCs in five areas: space exploration, African agriculture, vaccines for diseases of the poor, energy and climate change, and learning technologies. Under certain circumstances, inducement prizes may act as a useful complement to grants and contracts as a way to encourage technological innovation. The government can establish a goal without determining who is in the best position to reach the goal or what the most promising technical approach is. The government only pays the prize money if someone is successful, and may be able to leverage additional funding from foundations, philanthropists, and contestants who value the reputational benefits of winning the competition. Prizes can also generate public excitement and enthusiasm for science and technology, and encourage more young people to pursue careers in science, engineering, or technology-based entrepreneurship. Inducement prizes and AMCs cannot substitute for robust research funding, protection of intellectual property, and development of a world-class workforce, but they can be a powerful complement to those efforts. Although the optimal level of investment in prizes is not clear, it is surely much larger than the government's current very modest investment. We still have much to learn about the strengths and limitations of prizes, but the time to start additional experiments is now.