Sunday, March 16, 2014

Governing Innovation Prizes

Guest Blogger

Michael J. Burstein and Fiona E. Murray

For the conference on Innovation Law Beyond IP at Yale Law School

Thanks so much to Lisa and Amy for organizing what promises to be a terrific conference that comes at a time when scholars of innovation are increasingly recognizing that there is more to life than intellectual property.

As Lisa noted in her post kicking off the blog symposium, prizes have enjoyed a surge of attention lately in the popular and academic presses and among policy makers.  Prizes have a long historical pedigree – most famously, the British crown famously offered £25,000 for a method of calculating longitude at sea – but they played a decidedly secondary role for most of the 20th century.  That is changing as private sector organizations like the X Prize Foundation sponsor high profile prizes and as the federal government, under the 2010 America COMPETES Reauthorization Act, turns to prizes in addition to patents and grants.

Our paper uses a detailed case study of the Progressive Insurance Automotive X Prize (PIAXP) – a $10 million prize awarded for the development of a car that could achieve 100 miles-per-gallon in fuel efficiency – to identify the governance challenges that innovation prize competitions face and to explain how prize competitions represent a particular institutional approach to organizing collective action in innovation.

Most of the scholarly literature on prizes – Lisa’s piece is an exception, and so is some of Amy’s previous work – posits a choice among patents, prizes, and grants, and asks which incentive mechanism taken alone yields the most social welfare.  This literature has generated important insights but its ultimate conclusion is that the choice of innovation incentive depends on a number of context-specific circumstances.  The prizes modeled in the economic literature are also quite different from the prizes actually offered in the world.  In economic theory, prizes are rewards given to inventors after they invent instead of intellectual property.  The theory is that such rewards can provide an incentive to invent equal to that of intellectual property, but without the social welfare losses of exclusive rights.  In reality, however, prizes are typically offered in advance and the winners can keep any intellectual property rights for which they may be eligible.  Prizes therefore mostly substitute as complements to rather than substitutes for patents.

Heeding Brett and Mark’s call, in this paper we broaden the analysis away from social welfare and towards comparative institutionalism.  In particular, we focus on the governance of innovation prizes, a topic that previous accounts have mostly ignored.  The economic literature all but assumes that prize sponsors can credibly commit to awarding the prize, and government efforts to identify best practices in prize governance are still in their infancy.  Yet prize governance is critical both to the effective operation of these incentives and to understanding when they might be most useful.

The PIAXP experienced several challenges that we have reason to believe are typical of what other prize sponsors face.  The first challenge is how to establish the rules of the competition.  The problem here is that the technical knowledge needed to formulate aggressive yet achievable goals, and the rules of the competition to get there, are likely to be highly dispersed among a large number of individuals.  The PIAXP, for example, knew that it wanted to set a high standard for the ultimate fuel efficiency goal.  But it had to engage in an iterative process of rule development with a wide variety of experts – automotive engineers, environmental scientists, safety experts, and others – in order to arrive at a concrete number and in order to specify the other rules and guidelines that entrants would have to follow.  Of course, in small innovative communities, some of these experts may well have been potential competitors.  The second challenge arose when the technology outstripped the rules.  That is, the organizers found that they needed to change the rules when it turned out that the course of technological development left some rules obsolete or rendered some entrants non-comparable.  This led to predictable discontent among competitors who felt at times like the goal was a moving target.  Finally, the organizers needed to implement the rules fairly.  Like any legal problem, some guidelines were more rule-like while others were more standard-like.  Competitors often worried that necessary flexibility was implemented unevenly.

We argue that these challenges should not come as a surprise.  They arise because innovation is characterized by uncertainty and information asymmetries.  Progress toward any technological goal requires adaptation in the face of technological change that cannot be predicted ex ante, and often requires collaboration and information sharing among dispersed individuals.  These characteristics make it difficult for prize sponsors to credibly commit to awarding the prize.  It is difficult to do so when those who make the rules also abide by them, when the rules must change midstream, and when necessarily ambiguous criteria need to be applied to highly variable technologies.

But the challenges described above are not insurmountable.  In fact, they are not confined only to prizes.  Any innovation incentive mechanism must credibly assure its potential takers that they will receive what they have bargained for.  The patent system does this by affording applicants due process and judicial review.  The grant system does this through peer review.  Drawing from the institutional design literature pioneered by Lin Ostrom, and adapted to information commons by Brett, Yochai Benkler, and others, we suggest that iterative decision making, transparency and collaboration, and effective dispute resolution can improve the functioning of prize governance. 

Prizes can be seen as an alternative institutional response to the problems of uncertainty and information asymmetry.  They offer a different arrangement for organizing innovation than do either the patent or the grant systems.  They provide institutional forums for collective action toward a particular technological goal even though uncertainty and information asymmetries may not be fully resolved over the course of development. We conclude by suggesting that the choice of innovation incentive mechanism should take into account how each organizes innovation and which system of organization 
is best suited to a particular technological problem.

Michael J. Burstein is an assistant professor of law at Cardozo. He can be reached at mburstei at

Fiona E. Murray is the Alvin J. Siteman Professor of Entrepreneurship and the Associate Dean of Innovation at the Sloan School of Management (MIT). She can be reached at fmurray at

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