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Grand Innovation Prizes: a Theoretical, Normative, and Empirical Evaluation

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Grand Innovation Prizes: a Theoretical, Normative, and Empirical Evaluation Research Policy 41 (2012) 1779–1792 Contents lists available at SciVerse ScienceDirect Research Policy jou rnal homepage: www.elsevier.com/locate/respol Grand Innovation Prizes: A theoretical, normative, and empirical evaluation a,∗ b a,1 c Fiona Murray , Scott Stern , Georgina Campbell , Alan MacCormack a MIT Sloan School of Management, 100 Main Street – e62-470, Cambridge, MA 02142, United States b MIT Sloan School of Management and NBER, 100 Main Street – e62-474, Cambridge, MA 02142, United States c Harvard Business School, Soldiers Field Road, Boston, MA 02163, United States a r t i c l e i n f o a b s t r a c t Article history: This paper provides a systematic examination of the use of a Grand Innovation Prize (GIP) in action – the Received 16 May 2011 Progressive Automotive Insurance X PRIZE –a $10 million prize for a highly efficient vehicle. Following a Received in revised form 7 June 2012 mechanism design approach we define three key dimensions for GIP evaluation: objectives, design, and Accepted 17 June 2012 performance, where prize design includes ex ante specifications, ex ante incentives, qualification rules, Available online 31 October 2012 and award governance. Within this framework we compare observations of GIPs from three domains – empirical reality, theory, and policy –tobetter understand their function as an incentive mechanism Keywords: for encouraging new solutions to large-scale social challenges. Combining data from direct observation, Innovation personal interviews, and surveys, together with analysis of extant theory and policy documents on GIPs, X PRIZE Incentive our results highlight three points of divergence: first, over the complexity of defining prize specifications; Energy secondly, over the nature and role of incentives, particularly patents; thirdly, the overlooked challenges Competition associated with prize governance. Our approach identifies a clear roadmap for future theory and policy Challenge around GIPs. © 2012 Elsevier B.V. All rights reserved. 1. Introduction monetary prizes awarded to the xinnovator(s) providing the best or first solution to a pre-determined set of significant new perfor- Solving grand social challenges requires the development of mance goals with no path to success known ex ante and believed to fundamentally new innovations and, possibly, entirely new inno- require significant commitment and a breakthrough solution (see vation incentives. Appropriate incentive design must confront at Kay, 2011). Second, we distinguish GIPs from smaller-scale compe- two distinct issues. First, as their name implies, “grand” challenges titions and challenges for well-defined (albeit difficult) problems often involve fundamental breakthroughs that rely on harness- that often require only limited time commitment (see Brunt et al., ing unusual stakeholders across unexpected bodies of expertise. 2008) or involve matching or adapting existing solutions to prob- Second, the social nature of many grand challenges forces poli- lems - for example, many of those posted on InnoCentive, TopCoder cymakers to think beyond existing market incentives to attract and elsewhere (see Jeppesen and Lakhani, 2006; Boudreau et al., the attention of sufficiently diverse and committed a range of 2011). innovators to yield solutions. Consequently, traditional incentive Contemporary interest in GIPs has been particularly intense in mechanisms – procurement and patents – often fail to induce the United States. Galvanized by compelling narratives of historical innovators to tackle grand missions: patents do not provide ade- prizes (Sobel, 1995; Siegel, 2009), a community of activists across quate incentives for challenges subject to market failure, and the public and private sectors increasingly champion GIPs. The X procurement-oriented approaches constrain both the set of pos- PRIZE Foundation has also led efforts to implement and define GIPs 2 sible innovators and the range of approaches they consider. through their X PRIZE initiatives. In government, the 2010 Amer- Given these limitations, the resurgence of interest in an alterna- ica COMPETES Reauthorization Act authorized Federal agencies to tive mechanism – prizes – is hardly surprising. Prize mechanisms pursue prizes – both GIPs and smaller competitions – for a range of fall broadly into two types (although a sharp dividing line does not problems (OSTP, 2009; Zients, 2010; Lane and Bertuzzi, 2011). Sev- exist). First we define Grand Innovation Prizes GIPs). These are large eral international initiatives have also explored GIPs particularly in global health (Kremer, 1998, 2002; Willetts, 2010). ∗ Corresponding author. E-mail addresses: [email protected] (F. Murray), [email protected] (S. Stern), [email protected] (G. Campbell), [email protected] (A. MacCormack). 1 2 Present address: Sun Catalytix, 325 Vassar Street, Cambridge, MA 02139, See Diamandis (accessed from http://www.xprize.org/prize-development on United States. 14.10.11). 0048-7333/$ – see front matter © 2012 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.respol.2012.06.013 1780 F. Murray et al. / Research Policy 41 (2012) 1779–1792 Despite policy directives and private action to deploy this inno- 2. A short history of Grand Innovation Prizes vation mechanism, systematic analysis of GIPs remains limited (Williams, 2012). Relative to the extensive body of theoretical As this special issue highlights, society confronts a range of research considering the design of patents (e.g. Nordhaus, 1969; daunting challenges; public health to food security, energy, and Merges and Nelson, 1990; Scotchmer, 2004) or procurement con- defense. These are simultaneously extremely costly when they go tracts (e.g. Laffont and Tirole, 1992) little economic theory explicitly unsolved and yet remain highly intractable. In many cases, the considers the properties of innovation prizes, or how prizes operate solution of these grand challenges depends on the development in comparison to other incentive mechanisms (see Wright, 1983; of macro innovations for which the solution (as well as the solu- Shavell and van Ypersele, 2001; Scotchmer, 2004). The most signifi- tion path) is difficult to establish ex ante. The very nature of these cant gap is the lack of empirical studies of contemporary GIPs (such grand challenges and their solutions implies that traditional inno- as those offered by the X PRIZE Foundation). There exist reasonable vation mechanisms likely fall short (Mokyr, 1999). On the one accounts of historical cases (e.g. Sobel, 1995). However, the study hand, procurement contracts limit the scope of experimentation by Brunt et al. (2008) of prizes and medals offered by the Royal and are rarely able to induce the macro innovations required. At Agricultural Society and Kay’s recent detailed analysis of prizes for the same time, many grand challenges are the consequence of sig- space innovation including the Northrop Grumman Lunar Lander nificant market failure; market-based incentive mechanisms thus Challenge (Kay, 2011) provide the only empirical analyses of GIPs have limited value. Alternative approaches are required to encour- to date. While these papers start to detail how GIPs work in prac- age innovations to address grand social challenges. The question tice, the lack of empirics remains worrisome as popular advocacy is therefore: what mechanisms can ensure that significant effort, grows. creativity and experimentation are plausibly focused on the chal- To bridge this gap, this paper draws on an in-depth study of lenges at hand? Faced with this question, it is perhaps not surprising the $10 million Progressive Insurance Automotive X PRIZE (PIAXP). that policymakers have gone “back to the future” and turned their We leverage detailed information from the teams, organizers and attention towards prizes and challenges of all types but most cen- judges involved in the prize to test theoretical and normative claims trally on Grand Innovation Prizes – prizes for innovations that met against the facts on the ground. To enrich our analysis, we explic- significant challenges. itly compare theoretical arguments regarding GIPs, positions taken by GIP advocates, and the empirical reality of the PIAXP. To do 2.1. Historical perspectives so, we develop a simple framework that defines three dimensions over which to evaluate prizes: objectives, design, and performance. As early as the thirteenth century, governments established Rather than an exhaustive assessment of the entire GIP landscape, incentive systems to encourage innovations to address their most our evaluation offers a window into how the claims made by prize pressing needs. In this context, GIPs have a storied history as a theorists and advocates compare with a Grand Innovation Prize in tool of innovation policy to induce solutions to national challenges practice. We have five key findings: (see the detailed catalogue in Knowledge Ecology International, 2008). By the sixteenth century, governments and private actors • GIPs are used to meet more complex and multi-faceted goals than provided inventors with significant ex post monetary rewards for anticipated in theoretical or policy analysis. Education, attention breakthrough innovations; the British Parliament rewarded Jenner and community building can be as important as the technical for his vaccine inoculation and Gatehead for the lifeboat (MacLeod, solutions themselves. 2007). The eighteenth century saw the more systematic use of • While theorists design prizes with the object of producing effi- ex ante Grand Innovation
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