The prize is right?
Posted by Rich Sweeney on October 18, 2007
In my rundown of the the Democratic contenders’ environmental platforms last week I mentioned that I’d have a follow up post on Barack Obama’s idea about using cash prizes to promote energy innovation. This is something I’ve been interested in for a few years now, although mainly in the context of pharmaceutical innovation. Recently, however, I’ve become increasingly convinced that energy markets in the face of global climate change present just the type of problem that prizes might be good at solving.
For a good introduction to prizes for technological innovation, see Thomas Kalil’s recent Hamilton Project discussion paper. Basically, prizes are useful when the end goal is easily defined but the means of achieving that goal are too speculative to be reasonable for a traditional research program or procurement. Prizes can also have the added benefits of raising public awareness of and excitement about an issue, and attracting new teams with fresh ideas to the market in question. Finally, prizes sever the often counterproductive link between R&D and production. This becomes a problem when the the reward (or profit) a firm can extract from selling a new product it develops is lower than the benefit this innovation provides to society. In the pharma example, many drugs that address disproportionately “poor” ailments never come down the pipeline because drug companies know that their target markets won’t be able to afford them. However, politicians in the west might realize positive externalities (security, morality, etc) from avoiding suffering in the developing world, and could commit to purchase a given cure up front to secure their fruition.
Of course prizes also have limitations. First of all, participants are still partially limited by their ability to raise capital to do the research. Second, prizes are more likely to lead to duplication of effort, which could be costly from a societal perspective. Finally, and I believe most importantly, it can be very difficult to define success. Defining success too loosely wastes resources and could limit future innovation by forcing society to commit to a suboptimal solution. On the other hand, defining success to narrowly undermines both the “open-canvass” spirit of the prize as well as the enthusiasm/ interest of possible participants.
Given these very basic pros and cons, can anyone think of any energy/ environment related ends that might be well suited for a governmental prize? I’ve been thinking about the possibility of carbon capture and sequestration (CCS) just because currently there seem to be preverse disinsentives for companies with already built coal plants to do the necessary R&D. Relatedly, one thing that’s come up recently in post-Kyoto talks is the need for the developed world to commit to transfer green technologies to places like China and India. It seems like this would be much easier if said technologies were the results of governmental contests, as the government could then do whatever it wanted with them.
Anyone have any other ideas?