During the past decade, largely as a result of a 1999 report of a workshop convened by the NAE, interest has grown in exploring ways for the federal government to add inducement prizes to its toolbox of methods for encouraging innovation. The NAE report9 recommended that federal agencies experiment with the use of innovation inducement prizes. The DARPA autonomous vehicle prize was in part prompted by the NAE support of the concept.

The 109th Congress had under consideration a bill, H.R. 5143, entitled the “H-Prize Act of 2006,” that would authorize the secretary of energy to carry out a program to competitively award cash prizes to advance the research, development, demonstration, and commercial application of hydrogen energy technologies. The bill passed the House of Representatives in May 2006.

The present study has been carried out in response to a mandate of Congress in appropriating FY 2006 funds that the National Science Foundation (NSF) establish a program of innovation inducement prizes and that it seek the advice of the National Academies in setting up this program. The specific charge to the NSF and the Academies is discussed below.

STRENGTHS AND LIMITATIONS OF INNOVATION INDUCEMENT PRIZES

Owing to the limited experience with innovation prizes, relatively little is known about how they work in practice or how effective they may be as compared with, for example, R&D grants and contracts, or tax incentives. The theoretical academic literature suggests that not all research problems call for the same incentive instrument. The choice depends on, among other things, the degree to which rewards can depend on cost or on success or failure and the degree to which sponsors rather than researchers can assess research plans in advance.10 The limited practical experience with prizes underscores the importance of topic selection, prize

9

National Academy of Engineering. Concerning Federally Sponsored Inducement Prizes in Engineering and Science. Report of the Steering Committee for the Workshop to Assess the Potential for Promoting Technological Advance Through Government-Sponsored Prizes and Contests, National Academy Press 1999. On the Web at www.nap.edu/catalog/9724.html.

10

See, generally, Scotchmer, Suzanne. Innovation and Incentives. Cambridge, Mass.: M.I.T. Press, 2004, Chap. 2. For a discussion of the strengths and weaknesses of inducement prize contests in the context of climate change, see Newell, Richard G., and Nathan E. Wilson. “Technology Prizes for Climate Change Mitigation,” Resources for the Future Discussion Paper, RFFDP 05-33, June 2005.



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