Elsevier

Research Policy

Volume 41, Issue 10, December 2012, Pages 1779-1792
Research Policy

Grand Innovation Prizes: A theoretical, normative, and empirical evaluation

https://doi.org/10.1016/j.respol.2012.06.013Get rights and content

Abstract

This paper provides a systematic examination of the use of a Grand Innovation Prize (GIP) in action – the Progressive Automotive Insurance X PRIZE – a $10 million prize for a highly efficient vehicle. Following a mechanism design approach we define three key dimensions for GIP evaluation: objectives, design, and performance, where prize design includes ex ante specifications, ex ante incentives, qualification rules, and award governance. Within this framework we compare observations of GIPs from three domains – empirical reality, theory, and policy – to better understand their function as an incentive mechanism for encouraging new solutions to large-scale social challenges. Combining data from direct observation, personal interviews, and surveys, together with analysis of extant theory and policy documents on GIPs, our results highlight three points of divergence: first, over the complexity of defining prize specifications; secondly, over the nature and role of incentives, particularly patents; thirdly, the overlooked challenges associated with prize governance. Our approach identifies a clear roadmap for future theory and policy around GIPs.

Highlights

► We provide an empirical examination of a Grand Innovation Prize (GIP) in action. ► Divergence exists between the empirical reality of GIPS and the literature on prize theory and policy. ► We offer a practical framework and roadmap for future GIP theory, policy and design. ► GIP design includes specifications, incentives, qualification rules and governance.

Introduction

Solving grand social challenges requires the development of fundamentally new innovations and, possibly, entirely new innovation incentives. Appropriate incentive design must confront at two distinct issues. First, as their name implies, “grand” challenges often involve fundamental breakthroughs that rely on harnessing unusual stakeholders across unexpected bodies of expertise. Second, the social nature of many grand challenges forces policymakers to think beyond existing market incentives to attract the attention of sufficiently diverse and committed a range of innovators to yield solutions. Consequently, traditional incentive mechanisms – procurement and patents – often fail to induce innovators to tackle grand missions: patents do not provide adequate incentives for challenges subject to market failure, and procurement-oriented approaches constrain both the set of possible innovators and the range of approaches they consider.

Given these limitations, the resurgence of interest in an alternative mechanism – prizes – is hardly surprising. Prize mechanisms fall broadly into two types (although a sharp dividing line does not exist). First we define Grand Innovation Prizes GIPs). These are large monetary prizes awarded to the xinnovator(s) providing the best or first solution to a pre-determined set of significant new performance goals with no path to success known ex ante and believed to require significant commitment and a breakthrough solution (see Kay, 2011). Second, we distinguish GIPs from smaller-scale competitions and challenges for well-defined (albeit difficult) problems that often require only limited time commitment (see Brunt et al., 2008) or involve matching or adapting existing solutions to problems - for example, many of those posted on InnoCentive, TopCoder and elsewhere (see Jeppesen and Lakhani, 2006, Boudreau et al., 2011).

Contemporary interest in GIPs has been particularly intense in the United States. Galvanized by compelling narratives of historical prizes (Sobel, 1995, Siegel, 2009), a community of activists across the public and private sectors increasingly champion GIPs. The X PRIZE Foundation has also led efforts to implement and define GIPs through their X PRIZE initiatives.2 In government, the 2010 America COMPETES Reauthorization Act authorized Federal agencies to pursue prizes – both GIPs and smaller competitions – for a range of problems (OSTP, 2009, Zients, 2010, Lane and Bertuzzi, 2011). Several international initiatives have also explored GIPs particularly in global health (Kremer, 1998, Kremer, 2002, Willetts, 2010).

Despite policy directives and private action to deploy this innovation mechanism, systematic analysis of GIPs remains limited (Williams, 2012). Relative to the extensive body of theoretical research considering the design of patents (e.g. Nordhaus, 1969, Merges and Nelson, 1990, Scotchmer, 2004) or procurement contracts (e.g. Laffont and Tirole, 1992) little economic theory explicitly considers the properties of innovation prizes, or how prizes operate in comparison to other incentive mechanisms (see Wright, 1983, Shavell and van Ypersele, 2001, Scotchmer, 2004). The most significant gap is the lack of empirical studies of contemporary GIPs (such as those offered by the X PRIZE Foundation). There exist reasonable accounts of historical cases (e.g. Sobel, 1995). However, the study by Brunt et al. (2008) of prizes and medals offered by the Royal Agricultural Society and Kay's recent detailed analysis of prizes for space innovation including the Northrop Grumman Lunar Lander Challenge (Kay, 2011) provide the only empirical analyses of GIPs to date. While these papers start to detail how GIPs work in practice, the lack of empirics remains worrisome as popular advocacy grows.

To bridge this gap, this paper draws on an in-depth study of the $10 million Progressive Insurance Automotive X PRIZE (PIAXP). We leverage detailed information from the teams, organizers and judges involved in the prize to test theoretical and normative claims against the facts on the ground. To enrich our analysis, we explicitly compare theoretical arguments regarding GIPs, positions taken by GIP advocates, and the empirical reality of the PIAXP. To do so, we develop a simple framework that defines three dimensions over which to evaluate prizes: objectives, design, and performance. Rather than an exhaustive assessment of the entire GIP landscape, our evaluation offers a window into how the claims made by prize theorists and advocates compare with a Grand Innovation Prize in practice. We have five key findings:

  • GIPs are used to meet more complex and multi-faceted goals than anticipated in theoretical or policy analysis. Education, attention and community building can be as important as the technical solutions themselves.

  • While theorists design prizes with the object of producing efficient levels of effort towards a goal, advocates and practitioners aim to maximize effort.

  • The design of the ex ante technical specification for GIPS is complex and specifications that ensure “appropriate” solutions are hard to predict ex ante.

  • Ex ante incentives are more nuanced than recognized by theorists or prize advocates. Retained IP ownership is often a complement not a substitute to the award.

  • Prize governance is of critical importance: “thin” institutional arrangements leave prize organizers vulnerable to disputes over the structure or fairness of GIP awards.

These findings have received little attention in the theoretical literature and are often assumed away by prize advocates. They suggest important divergences that have policy implications particularly as the government moves forward with prize implementation. Moreover, they suggest several paths for future empirical analysis.

Our paper proceeds as follows. Section 2 provides a brief history of the use of GIPs in incentivizing solutions to mission-oriented problems. In Section 3, we outline our framework as a context within which to evaluate the objectives, design, and performance of prizes. Section 4 describes the methodology for our comparative theory, policy and empirical analysis, focusing on the empirical methods used in the study of the PIAXP. Section 5 structures our findings around the evaluative framework comparing theory, policy–advocacy and the empirical reality of PIAXP. A final section briefly concludes.

Section snippets

A short history of Grand Innovation Prizes

As this special issue highlights, society confronts a range of daunting challenges; public health to food security, energy, and defense. These are simultaneously extremely costly when they go unsolved and yet remain highly intractable. In many cases, the solution of these grand challenges depends on the development of macro innovations for which the solution (as well as the solution path) is difficult to establish ex ante. The very nature of these grand challenges and their solutions implies

Evaluation framework

This section outlines a tractable yet systematic framework for evaluating Grand Innovation Prizes from the perspective of all stakeholders. We are not the first to evaluate prizes as a mechanism for encouraging innovation. Our approach, however, is distinct. Since the work of Wright (1983), the analysis of innovation prizes explicitly compares them with other mechanisms, identifying the conditions under which prizes are the preferred innovation incentive (see Gallini and Scotchmer, 2002,

Empirical case study

In the remainder of this paper we use our framework to make sense of a case study of a single GIP – the Progressive Insurance Automotive X PRIZE (PIAXP). With so little systematic evidence of contemporary GIPs we have chosen to focus in-depth on a single GIP rather than continue to rely on overused anecdotes. However, our principal aim is to understand the convergence and divergence among the theoretical analysis, normative advocacy, and the empirical reality of the PIAXP. Absent our evaluative

Results – a comparative evaluation of theoretical, normative policy and empirical perspectives

Our analysis was guided by the framework presented above and our results are presented accordingly (paying particular attention to the four crucial components of prize design). Of course, we use only one GIP – the Progressive Automotive X PRIZE – as our empirical comparison versus theoretical and policy views. In addition, while we found many differences among the three perspectives, we emphasize and provide support for only one or two most striking distinctions.

Conclusions

Recognizing the need to fill the gap between theory and practice in Grand Innovation Prizes with a richer understanding of the empirical facts on the ground as well as accounting for the divergence between prize theory, advocacy and the realities of running Grand Innovation Prizes, we analysed the Progressive Automotive Insurance X PRIZE. To do so effectively, we explicitly developed and used a framework that relies on three dimensions of prize analysis: objectives, design, and performance, to

Acknowledgements

The authors acknowledge research funding support from the National Science Foundation SciSIP Program, from the MIT Energy Initiative, and from the MIT Technology and Policy Program. Valuable comments and feedback were provided by participants in the MIT Technological Innovation, Entrepreneurship and Strategic Management Seminar, the University of Toronto Strategy Seminar and the MIT Energy Initiative Sponsors Meeting. Earlier versions of this paper were presented at several workshops for the

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