One must have a prize. (updated)

Tim Harford has an interesting column at FT.com on the use of prizes rather than, say, patents to stimulate innovation. Harford points out that in the past governments used prizes as the standard way of rewarding innovators. The most famous example being John Harrison's answer to the problem of finding a way for a ship's navigator to determine a ship's longitude and therefore its position at sea. But as Harford notes such prizes fell out of fashion. Patents became the standard way to encourage and protect commercial innovators while basic research is funded more by grants than prizes.

Until now. A number of groups are beginning to use prises again to motivate innovators to find answers to the groups problems. Harford gives the examples of

The most famous innovation prize of this century, the $10m Ansari X Prize, was designed to promote private space flight. The pot went to Mojave Aerospace Ventures in 2004, after the successful flights of SpaceShipOne. And even the Ansari X Prize is dwarfed by a quasi-prize of up to $1.5bn that is about to be offered by five national governments and the Gates Foundation to the developers and suppliers of a more effective vaccine against pneumococcal diseases such as pneumonia, meningitis and bronchitis. The prize, called an "advanced market commitment" or "advanced purchase commitment", takes the form of an agreement to subsidise heavily the first big orders of a successful vaccine. Given that the top companies in the UK’s powerful pharmaceutical industry spent little more than £5bn in 2006 on research and development, a $1.5bn prize should be taken seriously on hard-nosed commercial grounds alone.

Prizes have some nice features, one of which is that they overcome the biggest problem with patents; namely the monopoly that patents provide. This downside is fundamental to the very design of a patent,

... in order to reward an innovator, the patent confers a monopoly. Economists view this as, at best, a necessary evil since monopolies distort prices. In the hope of raising profits from some customers, they will price others out of a market. The most obvious victims are consumers in poor countries.

But as Jean Tirole has explained, in a world of incomplete contracts (ie the real world) the patent system may make sense,

It has long been recognized that patents are an inefficient method for providing incentives for innovation since they confer monopoly power on their holders. Information being a public good, it would be ex post socially optimal to award a prize to the innovator and to disseminate the innovation at a low fee. Yet the patent system has proved to be an unexpectedly robust institution. That no one has come up with a superior alternative is presumably due to the fact that, first, it is difficult to describe in advance the parameters that determine the social value of an innovation and therefore the prize to be paid to the inventor, and, second, that we do not trust a system in which a judge or arbitrator would determine ex post the social value of the innovation (perhaps because we are worried that the judge might be incompetent or would have low incentives to become informed, or else would collude with the inventor to overstate the value of the innovation or with the government to understate it). A patent system has the definite advantage of not relying on such ex ante or ex post descriptions (although the definition of the breadth of a patent does).

But as Harford explains it isn't all or nothing, patent or prize, but rather the

[c]hampions of prizes see them as a component of a wider system to promote innovation, rather than as an outright replacement either for grants or patents. Instead, the hope is that prizes will help to compensate for the specific weaknesses of those alternatives.

Another way to reward innovation would be to grant a patent and then have the government buy it and place in the public domain. Each patent could be put up for auction and at the end of the auction ownership of the patent could be randomly determined. If the (private) winner of the auction is chosen then he pays his bid and gets the patent and if the government is chosen it pays the amount of private winner's bid and is assigned the patent.

Anyway the Harford article is worth reading.

Update: The Victory Project proposes billion-dollar prizes for

To the first person(s) that solves any of these Problems:

1. Develop a cure for breast cancer.
2. Develop a cure for diabetes.
3. Reduce greenhouse emissions from petroleum powered automobiles by 95% without increasing the cost of a normal car more than 5%.
4. Achieve 150 miles per gallon of gasoline in a 3,000 lb. car, using EPA standards; without increasing the cost of a normal car more than 10%.

(HT: Arnold Kling, EconLog)