Want Innovation? Offer a Prize

GMU's Robin Hanson is mentioned in today's New York Times in an article on using prizes to motivate innovation (emphasis mine):

Netflix unwittingly started down the path of proving that today’s economy doesn’t have nearly enough prizes.

BACK in the 1700s, prizes were a fairly common way to reward innovation. Most famously, the British Parliament offered the £20,000 longitude prize to anyone who figured out how to pinpoint location on the open sea. Dava Sobel’s best-selling 1995 book “Longitude” told the story of the competition that ensued, and Mr. Hastings mentioned the longitude prize as a model at that meeting back in March.

Eventually, though, prizes began to be replaced by grants that awarded money upfront. Some of this was for good reason. As science became more advanced, scientists often needed to buy expensive equipment and hire a staff before having any chance of making a discovery.

But grants also became popular for a less worthy reason: they made life easier for the government bureaucrats who oversaw them and for the scientists who received them. Robin Hanson, an economist at George Mason University who has studied the history of prizes, points out that they create a lot of uncertainty — about who will receive money and when a government will have to pay it. Grants, on the other hand, allow a patron (and the scientists advising that patron) to choose who gets the money. “Bureaucracies like a steady flow of money, not uncertainty,” said Mr. Hanson, who worked as a physicist at NASA before becoming an economist. “But prizes are often more effective if what you want is scientific progress.”

These are the two essential advantages of prizes. They pay for nothing but performance, and they ensure that anyone with a good idea — not just the usual experts — can take a crack at a tough problem. Much to the horror of the leading astronomers of the day, a clockmaker ultimately claimed the longitude prize.

The good news is that the Netflix prize is one of a handful of recent high-profile prizes. One of the others is the X Prize, which was created in 1996 as a $10 million purse for the first private manned flight to the cusp of space. It was awarded just eight years later, showing once again that prize money has a way of focusing the mind.

Indeed it does! Read the whole thing.

Coincidentally, a notable GMU grad was one of the sponsors of the X-Prize.

See my previous posts on Dr. Hanson here. Also be sure to check out his excellent blog, Overcoming Bias. It looks like Jane Galt likes it too!

(HT Greg Mankiw)