Can Washington get America's economy moving again with cash rewards?

Commentary about business and finance.
Dec. 27 2010 6:23 PM

Prizewinning Policy

Can Washington get America's economy moving again with cash rewards?

SpaceShipOne. Click image to expand.
SpaceShipOne

In the flurry of activity at the end of the 111th Congress, the reauthorization of the "America COMPETES Act" went mostly unnoticed. But it is a little bill that Washington hopes will prove transformative. The law—its cringeworthy official name is the America Creating Opportunities To Meaningfully Promote Excellence in Technology, Education, and Science Act—overhauls the way the federal government supports private-sector R & D, and one of the main ways the government hopes to support R & D is with prizes. Lots of prizes.

So-called "inducement prizes" (as opposed to "recognition prizes," like the Nobel or the MacArthur or the Pulitzer) make up a major part of the Obama administration's grand Strategy for American Innovation. Last year, outlining its vision for a more competitive America, the White House said the government "should take advantage of the expertise and insight of people both inside and outside" Washington by using "high-risk, high-reward policy tools such as prizes and challenges to solve tough problems." This fall, Challenge.gov, a portal featuring agencies' cash rewards for new ideas, debuted. And the COMPETES Act, which first passed in 2007, included a provision clarifying some legal issues around such contests.

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There's good reason for the government to get in on it: Prizes work, and they have a surprisingly long pedigree. Most famously, in 1714, the British government offered £20,000 to anyone who could devise a reliable way of measuring longitude at sea, a problem neither Newton nor Galileo could solve. (Clockmaker John Harrison won in 1773.) Napoleon offered a prize for innovations in food preservation for his army, leading to the development of modern canning. And the $25,000 Orteig Prize spurred Charles Lindbergh to make his trans-Atlantic flight.

After falling out of favor for decades, such high-publicity, fat-reward contests came into vogue again in the aughts in the wake of the 1996 Ansari X Prize for advances in commercial spaceflight. (A Paul Allen-financed group called Scaled Composites won the whole $10 million shebang in 2004.) The much feted X Prize showed that prizes, properly constructed, can be cheaper and more effective than traditional R & D. They're a performance-based investment, one that pays only for outcomes. They encourage unconventional thinkers from different fields to join in to solve a problem. And they include a prestige component, which costs the offerer nothing but can be highly valued by those pursuing the prize: The X Prize found that "competitors spent 10 to 40 times" the amount of the kitty.

Unsurprisingly, the funding available for prizes has exploded up in the past decade, according to a study by McKinsey, to as much, perhaps, as $2 billion. "More than 60 of these prizes have debuted since 2000, representing almost $250 million in new prize money," with awards from existing prizes tripling in the past 10 years, researchers wrote.

The evidence backing the prize boom is not entirely anecdotal, either. There is not a huge body of academic research into prizes, but what there is supports them. One oft-cited study examines the prizes offered by the Royal Agricultural Society of England between 1839 and 1939. "We find large effects of the prizes on contest entries," the researchers wrote in 2008, confirming that prizes do indeed spur innovation, as opposed to just rewarding pre-existing advances. "[W]e also detect large effects of the prizes on the quality of contemporaneous inventions."

The government—with its massive research budget and interest in helping private industry where the market fails—got into the prize business in earnest in the early aughts. NASA, for instance, created the Centennial Challenges, giving out dozens of prizes ranging from $50,000 to $2 million. (One retired engineer built a better space glove at home, working with a sewing needle.) And the Defense Advanced Research Projects Agency, or DARPA, offers a famed contest aiming to make ground combat vehicles unmanned.

The Obama administration plans to exploit this trend—not just because prizes work, but also because of the ancillary benefits for government. Open-source innovation helps Washington break down its own research silos. Agencies such as NASA have their own scientists to solve problems; prizes let everyone from academics to hobbyists bring their expertise to bear. Moreover, prizes develop innovations that immediately benefit the public good. (The government funds a lot of research that has no immediate or obvious public use or that goes to the primary benefit of private corporations. Not so for prizes.)

But how to design contests to gin up the best innovations? Washington has actually tried to answer that question. In 2009, the Congressional Research Service, the research arm of Congress, published a thorough survey of government prizes and their efficacy. To work best, it said, the challenge needs to be big (a question interesting enough to pique interest), specific (a question that can be answered),and rewarding (a question worth answering, with a prize worth winning). The top of its list of best practices reads: "The contest goal is widely judged to be worth pursuing and is in fact among the most important challenges facing the nation." The prizewinning answer needs to offer "substantial" benefit to society, ideally in a "high-risk but high-reward" contest.

Thus far, the embryonic Challenge.gov is not always living up to that standard. For one, some of the prizes are way too small—as little as $1,000. And not all of the prizes are of demonstrable social value. For instance, o ne challenge asks participants to take an image from the National Archives "and mash it with the everyday world for a unique perspective on history today." Winners, the contest notes, "will be featured in a National Archives postcard book."

But the site does include some big fish—such as the Department of Energy's $15 million effort to design better light bulbs or the government-backed, just-completed $10 million X Prize to design a production-ready four-person car with 100-mile-per-gallon fuel efficiency.

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