Friday, March 21, 2014

Prizes and Grants: A Commentary on Burstein & Murray, and on Sampat

Guest Blogger

Jonathan Masur

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

                  Lisa and Amy have put together what will surely be a fantastic conference on Innovation Law Beyond IP.  I have been lucky enough to be assigned to comment on two wonderful papers on prizes and grants, the first by Michael Burstein and Fiona Murray, and the second by Bhaven Sampat.  The papers are both interesting in their own right and thought-provoking in combination, and I will offer some brief comments on both fronts here.

                  To my knowledge, Burstein and Murray’s in-depth examination of the Progressive Insurance Automotive X Prize (PIAXP) is the first of its kind.  Their research yields (at least) two unexpected and deeply important findings.  The first is the importance of process over substance.  Burstein and Murray observe that the rules for the PIAXP were not fully fleshed out when the competition began, and that organizers made regular and significant changes to many of the guidelines surrounding the prize.  This included splitting the competition into multiple divisions based upon automobile type, a major alteration if ever there was one.  Yet only a few disgruntled participants left the competition; the vast majority remained and competed until they were eliminated.  Burstein and Murray document how the process of changing the rules was viewed by participants as legitimate and inclusive, and they argue that this legitimacy held the competition together despite the frequent substantive rule changes themselves.  An important question going forward is whether fair process will effectively inoculate substantive changes when the prize involves far-flung corporate competitors in an arms-length marketplace.  As is the case with respect to property regimes, the lessons that apply when competitors are members of a closer-knit community may not hold true when competitors are profit-maximizing rivals.

Second, and relatedly, Burstein and Murray correctly demonstrate the importance of the PIAXP participants’ motivations.  It seems evident that for most of the participants, something other than the money itself—the reputational gains from winning an X-Prize, the IP, or even simply the research challenge—must have been the primary motivation for entering.  For most participants, the net present value of competing is negative.  Again, going forward, it will be interesting to see whether this approach will scale.  When the majority of competitors for innovation prizes are for-profit firms, and the prizes are worth far more in financial than reputational terms, the prize rules and governance structures might assume greater importance.  Firms will be reluctant to invest significant capital chasing a prize unless they can be certain that the rules of the game are favorable from the outset (and will remain so).  Again, it may be that process will no longer substitute for substance in the formation of those rules.  This only heightens the concern that Burstein and Murray raise: the institutions offering prizes must pay close attention to the governance structures surrounding those prizes.

                  Bhaven Sampat’s fascinating paper Serendipity concerns a related subject: NIH grant funding.  Sampat’s research question is whether a large percentage of medical developments really are serendipitous and unexpected, as popular conceptions often have it.  The study he designs to answer this question is clever and yet highly intuitive.  Sampat connects NIH grants with the medical publications that they generated by coding the grants mentioned in the publication.  He then connects publications with patents by looking to see which publications are cited as references by which patents.  Finally, he connects patents to FDA-approved drugs via the Orange Book.  The result is a trail that leads from NIH grants all the way to commercially available pharmaceuticals.  By classifying the grants, publications, patents, and drugs by medical field, or even by type of disease, Sampat can determine what percentage of drugs spring from grants that were at least nominally directed at a different field of medicine.  His results are striking.  Across a number of different empirical specifications, Sampat finds that at minimum 30% of new drugs appear to have resulted from serendipitous discoveries.

                  A perplexing question raised by Sampat’s work is one that he acknowledges: are these discoveries truly serendipitous or actually strategic?  That is, perhaps researchers are applying for grants in a given field for the same reason that Willie Sutton robbed banks—because that’s where the money is—while nonetheless intending to do research and make advances in a cognate field.  Sampat notes that his data cannot answer this question, but in truth the answer might not matter.  Whether the NIH grants are yielding unexpected results, or whether they are merely serving as a minor transactional impediment to scientists who know what they want to study but must strategically frame their grant applications, the point is that the grants are generating valuable medical research in areas that the funding agencies never contemplated.  The rules set by the funding agencies are not nearly so restrictive or directive as they might think.

                  Sampat’s work in turn poses questions for Burstein and Murray.  Sampat calls into question the necessity, or the effectiveness, of trying to centrally direct research through funding rules.  Maybe the only objective should be to get money in the hands of researchers and let them get to work.  This in turn raises the question of how important it is to properly specify the governance regime for a non-IP mechanism of funding innovation.  Perhaps it is less important that the organizers of a prize, or a grant, get the rules “right” than that there be rules—any set of rules—that will induce participation.  On the other hand, it may be that the construction of a set of rules seen as fair and achievable is itself the greatest challenge within a grant or prize regime.  These two papers are engaged in an important conversation on that topic, one which I expect (and hope) will play a central role in this excellent conference.

Jonathan Masur is a professor of law at the University of Chicago. He can be reached at jmasur at

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