Can cash prizes for in­no­va­tion get the econ­omy rolling again?

The Washington Post Sunday - - G2 - BY AN­NIE LOWREY

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 cringe-wor­thy of­fi­cial name is the Amer­ica Cre­at­ing Op­por­tu­ni­ties to Mean­ing­fully Pro­mote Ex­cel­lence in Technology, Ed­u­ca­tion, and Sci­ence Act — over­hauls the way the fed­eral govern­ment sup­ports pri­vate­sec­tor re­search and devel­op­ment, and one of the main ways the govern­ment hopes to sup­portR&Dis with prizes. Lots of prizes.

“In­duce­ment prizes” (as op­posed to “recog­ni­tion prizes,” like theNo­bel 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, Chal­, a por­tal fea­tur­ing agen­cies’ cash re­wards for newideas, de­buted. And the Amer­ica Com­petes Act, which passed in 2007, in­cluded a pro­vi­sion clar­i­fy­ing some le­gal is­sues around such con­tests.

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 pounds 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 transat­lantic 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, with a ve­hi­cle called SpaceShipOne, built by Burt Ru­tan’s com­pany 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 per­for­mance­based in­vest­ment, one that pays for out­comes. They en­cour­age un­con­ven­tional thinkers from dif­fer­ent fields to col­lab­o­rate 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 in the past decade, ac­cord­ing to a study by man­age­ment con­sult­ing firm McKin­sey & Com­pany, 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 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, orDARPA, 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. Open­source 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 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 “ high­risk but high-re­ward” con­test.

Thus far, the em­bry­onic Chal­ 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, one 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 En­ergy Depart­ment’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. As they say, that’s a win-win. Lowrey re­ports on eco­nom­ics and busi­ness for Slate.

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