Mr Yumkella has a nice contribution on Project Syndicate entitled “The Power of the Prize“. He writes that “for centuries, governments have used prizes to spur innovative research that yields creative solutions to pressing global challenges,” and continues to provide interesting examples. He emphasizes that prizes should be used by governments to increase R&D towards clean technology. I have a couple of thoughts on this:
It is certainly correct to emphasize that prizes have the potential to attract R&D directed towards clean technology. However, the one big problem with relying on prizes is that they provide money only ex post, if an innovation has been made and proven useful. But it is also true that R&D for clean technology often requires substantial finances up front. It is, therefore, more likely that prizes attract R&D activities on smaller problems that may be solvable without large up-front sunk costs than on bigger ones like car engine efficiency.
Also, it may be questionable inhowfar prizes really provide incentives to undertake R&D activities. It may simply be that someone wants to make a certain process more efficient or attempts to find a solution to a problem without having been initially drawn to it by the possibility of obtaining a prize. This was, for example, the case for the development of the zeer pot.
Clearly, it is unlikely that prizes harm incentives. However, one way to really increase the usefulness of prizes is to link prizes to specific research questions. Like this researchers will know what financial remuneration they may obtain in case they find a solution to that specific question.