Concerning Federally Sponsored Inducement Prizes in Engineering and Science (1999)

Named prize contests aimed at inducing contestants to invest effort in pursuit of specific scientific, technological, and societal objectives have seen very little use to date as instruments of federal technology policy. However, discussion at the NAE workshop and findings of related scholarship on the optimal design of federal R&D programs including grants, contracts, patent races, and other “prize-like” mechanisms, suggest that named inducement prizes may have a useful complementary role to play in the federal government's portfolio of policy instruments.

Compared with traditional research grants and procurements, inducement prize contests appear to have several comparative strengths that may offer them an advantage over other traditional contracts and grants in the pursuit of particular scientific and technological objectives. Specifically, these include:

• the ability of prize contests to attract a broader spectrum of ideas and participants by reducing the costs and other bureaucratic barriers to individual or firm participation;

• the ability of federal agencies to shift more of the risk for achieving or striving toward a prize objective from the agency proper to the contestants;

• the potential of prize contests for leveraging the financial resources of sponsors; and

• the capacity of prizes for educating, inspiring, and occasionally mobilizing the public with respect to particular scientific, technological, and societal objectives.

Inducement prize contests may be used to pursue many different objectives —scientific, technological, and societal. In particular, they might be used profitably to identify new or unorthodox ideas or approaches to particular challenges, demonstrating the feasibility or potential of particular technologies, promoting the development and diffusion of specific technologies, addressing intractable or neglected societal challenges, or educating the public about the excitement and usefulness of research and development.

Accordingly, the steering committee believes that by drawing on this limited knowledge base, federal agencies that sponsor research, technology development, and deployment in engineering and science should be encouraged to engage in limited experiments with inducement prize contests.

1. The steering committee recommends limited experiments in the use of federally sponsored inducement prize contests to stimulate private-sector research, innovation, and technology deployment in service of agency and societal goals.

Specifically, the committee recommends that Congress encourage federal agencies to study further the feasibility of inducement prize contests as a potential complement to their existing portfolio of science and technology policy instruments. In addition, Congress should consider providing explicit statutory authority and, where appropriate, credible funding mechanisms for agencies to sponsor and/or fund such contests.

It is important to note that the purpose of these experiments would be to test the effectiveness of prizes and contests as complements to—not replacements for—traditional R&D grants and procurement contracts.

2. Both Congress and federal agencies are encouraged to take a flexible approach to the design and administration of inducement prize contests.

Prize contests can be agency funded and administered; agency administered and privately funded; agency initiated and privately funded and administered; or joint agency-private sector funded and administered. Prize contest rules must be seen as transparent, simple, fair, and unbiased. Prize rewards must be commensurate with the effort required and goals sought. Moreover, prize contest designs should include mechanisms for appropriating prize money, for flexibly distributing intellectual property rights, and for reducing political influence.

3. Given its experimental nature, the use of prizes and contests should be accompanied by a mechanism for evaluation and a time limit.

The use of inducement prize contests should be evaluated at specified intervals by the agencies involved to determine their effectiveness and impact.

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Farrell, J., and C. Shapiro. 1992. Standard setting in high-definition television. Brookings Papers: Microeconomics 1992. Washington, D.C.: Brookings Institution.

Fountain, J. E. 1998. Social capital: A key enabler of innovation. In Investing in Innovation: Creating a Research and Innovation Policy that Works, L. M. Branscomb and J. H. Keller, eds. Cambridge, Mass.: MIT Press.

Fullerton, R. L., and R. P. McAfee. 1999. Auctioning entry into tournaments. Journal of Political Economy 107(3):573–605.

Knezo, G. J. 1999. Research and Development: Major Federal Programs to Fund High-risk , Creative R&D and Federal Prizes for R&D. Memorandum. Washington, D.C.: Congressional Research Service.

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¹ See page iv for the steering committee roster.

² Windham, P. H., “Background Paper: Workshop on the Potential for Promoting Technological Advance through Federally Sponsored Contests and Prizes,” prepared for the National Academy of Engineering (March 1999). See excerpted sections of the Windham paper, “A Taxonomy of Technology Prizes and Contests,” in Appendix A.

³ Workshop participants are listed in Appendix B.

⁴ The workshop prospectus and agenda are included in Appendix B.

⁵ For further information concerning the Malcolm Baldrige National Quality Award, which is administered by the Department of Commerce, see the award's website at http://www.quality.nist.gov/ (date accessed: 14 June 1999). Various design and standards contests sponsored by U.S. government agencies in the areas of defense aerospace technology and communications have been labeled and evaluated as “prize contests” by a small community of scholars—wherein the “prize” may be the profits associated with winning a procurement contract, the temporary but profitable monopoly provided by intellectual property rights, windfalls from having the winning standard, etc. (Farrell and Shapiro, 1992; Rogerson, 1994). Moreover, contests for publicly funded research grants in highly competitive fields of research have also been looked at as “prize contests.” This research seeks to explain the incentive structure and dynamic of “prize-like” policy instruments and to assess their effectiveness relative to other policy mechanisms, and as such offers useful insights concerning the design of explicit inducement prize contests. However, the focus of the NAE workshop and this report is on explicit prize contests, i.e., contests for a named prize or award, not on “prize-like” contests.

⁶ See, for example, Farrell and Shapiro, 1992; Fullerton and McAfee, 1999; Lazear and Rosen, 1981; McLaughlin, 1988; Nalebluff and Stiglitz, 1983; Noll and Rogerson, 1998; O'Keeffe et al., 1984; Rogerson, 1989, 1994; Rosen, 1986; and Taylor, 1995.

⁷ For further information concerning the Nobel Prizes, Draper Prize, and Lasker Awards, see their respective websites: http://www.at.nobel.se/; http://www4.nationalacademies.org/nae/nae.nsf/Awards/; and http://www.laskerfoundation.com/ (accessed 5 November 1999).

⁸ Nevertheless, highly prestigious recognition prizes like the Nobel Prizes have been known to induce a certain amount of lobbying activity on behalf of particular prize candidates.

⁹ See Appendix A, section 2.1.2.

¹⁰ See Sobel, 1995, and Appendix A, section 2.1.1.

¹¹ For further information, see Appendix A, section 2.2.2; Knezo, 1999; and the prize websites: http://www.macfdn.org/programs/fel/fel_overview.htm; http://www.nsf.gov/pubs/1998/pecase98/pecase98.htm; and http://www.nsf.gov/nsb/awards/waterman/ (accessed 5 November 1999).

¹² See Knezo, 1999, p. 4.

¹³ See the text below, excerpted from section 244 of Public Law 106-65, 106^th Congress, 2^nd session (5 October 1999), National Defense Authorization Act for Fiscal Year 2000.

Sec. 244. DARPA Program for Award of Competitive Prizes to Encourage Development of Advanced Technologies.

(a) AUTHORITY.—Chapter 139 of title 10, United States Code, is amended by inserting after section 2374 the following new section:

“S 2374a. Prizes for advanced technology achievements

“(a) AUTHORITY.—The Secretary of Defense, acting through the Director of the Defense Advanced Research Projects Agency, may carry out a program to award cash prizes in recognition of outstanding achievements in basic, advanced, and applied research, technology development, and prototype development that have the potential for application to the performance of the military missions of the Department of Defense.

“(b) COMPETITION REQUIREMENTS.—The program under subsection (a) shall use a competitive process for the selection of recipients of cash prizes. The process shall include the widely-advertised solicitation of submissions of research results, technology developments, and prototypes.

“(c) LIMITATIONS.—(1) The total amount made available for award of cash prizes in a fiscal year may not exceed $10,000,000. “(2) No prize competition may result in the award of more than $1,000,000 in cash prizes without the approval of the Under Secretary of Defense for Acquisition, Technology, and Logistics.

“(d) RELATIONSHIP TO OTHER AUTHORITY.—The program under subsection (a) may be carried out in conjunction with or in addition to the exercise of any other authority of the Director to acquire, support, or stimulate basic, advanced and applied research, technology development, or prototype projects.

“(e) ANNUAL REPORT.—Promptly after the end of each fiscal year, the Secretary shall submit to the Committees on Armed Services of the Senate and the House of Representatives a report on the administration of the program for that fiscal year. The report shall include the following: “(1) The military applications of the research, technology, or prototypes for which prizes were awarded. “(2) The total amount of the prizes awarded. “(3) The methods used for solicitation and evaluation of submissions, together with an assessment of the effectiveness of those methods.

“(f) PERIOD OF AUTHORITY.—The authority to award prizes under subsection (a) shall terminate at the end of September 30, 2003.”

¹⁴ See, for example, Farrell and Shapiro, 1992; Fullerton and McAfee, 1999; McLaughlin, 1988; Rogerson, 1989, 1994; Taylor, 1995.

¹⁵ See Fullerton and McAfee, 1999.

¹⁶ Clearly, prize contests can be structured to be highly risk-averse in the selection of goals and the criteria for competing and winning. Indeed, there is both documented and anecdotal evidence of contest administrators who were sufficiently risk-averse to prevent or delay the award of prizes to winners who had met the contest criteria. See, for example, the history of the chronometer's invention in Sobel, 1995.

¹⁷ For further information concerning the X Prize and the CATS Prize, see Appendix A, sections 2.1.6 and 2.1.7, or their websites: http://www.xprize.org and http://www.space-frontier.org/EVENTS/CATSPRIZE_1 (accessed 5 November 1999).

¹⁸ Contestants in the RoboCup include high school students, graduate students, postdocs, faculty as well as researchers based in other not-for-profit as well as for-profit organizations. For further information regarding the “micro-mouse” contests and the RoboCup, see the website for the International Micro Robot Maze Contest at http://www.mein.nagoya-u.ac.jp/maze and the Robot World Cup Initiative at http://www.robocup.org (accessed 5 November 1999).

¹⁹ This point was made by Neen Hunt, executive director of The Albert and Mary Lasker Foundation, in her prepared remarks to workshop participants on 30 April 1999. See also the conclusions of Zuckerman, 1992, regarding the educational/inspirational role of prizes.

²⁰ See, for example, Colozza, 1990.

²¹ However, increasing the requirements of a contest in this way can shrink the pool of potential contestants. In the refrigerator contest, only large companies with distribution outlets in place could hope to compete. For further information concerning the SERP, see Appendix A, section 2.1.4, and also Langreth, 1994.

²² See Fountain, 1998. Fountain writes, “This form of capital, as powerful and physical as human capital, is the ‘stock' that is created when a group of organizations develops the ability to work together for mutual productive gain.”

²³ Personal correspondence of 2 May 1999 from John S. Langford, President, Aurora Flight Sciences Corporation, to Proctor Reid, Associate Director, Program Office, National Academy of Engineering.

²⁴ The Wolfskehl Prize was created in 1908 to reward whoever could prove Fermat's Last Theorem, i.e., that the equation xⁿ + yⁿ = zⁿ has no whole number solutions for n greater than 2. The prize was won by Princeton professor Andrew Wiles in 1997. For further information concerning the Wolfskehl Prize, see Appendix A, section 2.1.13.

²⁵ For further information concerning the Loebner Prize, see Appendix A, section 2.1.9. How much additional effort the Loebner Prize induces from prize contestants above and beyond what they would have done without the inducement of the prize is difficult to determine.

²⁶ See note 6 above.

²⁷ See, for example, Fullerton and McAfee, 1999.

²⁸ For further discussion of “bandwagon effects” see Zuckerman, 1992, p. 228–229.