Prize Competitions: Effective Strategy to Spur Innovation?

In September 2010, the Obama administration launched Challenge.gov– an online portal for federal agencies to engage the public to offer solutions that address issues of national priority in return for monetary and non-monetary prizes. Since its launch in 2010, more than 80 federal agencies have run nearly 500 competitions and awarded upwards of $150 million in prizes. Challenge.gov is one of the most well-known examples of this growing trend in government and foundation funding. In addition to Challenge.gov, U.S. states, local governments, and foundations have announced similar prize competitions to help address important societal and S&T issues.

While innovation prize competitions have become a popular funding mechanism, proponents and critics remain split on the success of these competitions in spurring innovation. In an attempt to understand the impacts of prize competitions on innovation, several recent academic research articles have been released to provide empirical evidence about these prize competitions.

From a policy perspective, the implementation of state-subsidized innovation contests in addition to the existing intellectual property rights system should be questioned according to a new study from researchers at the University of Göttingen, Germany. These findings were based on two negative overlapping effects – lack of cooperation and intellectual property rights. The researchers found that prize competitions reduce the willingness to cooperate between subjects compared to a benchmark condition without an innovation contest. They also found the total innovation activity is not influenced by introducing innovation prize competitions. This lack of increased activity is mostly driven by the loss of intellectual property rights. The authors contend that prize competitions may be more effective if they allow innovators to choose between intellectual property rights and an innovation prize.

In Prizes Versus Contracts as Incentives for Innovation, researchers from several universities studied the potential of prize competitions as they compared to contract agreements – a traditional form of government innovation funding. The researchers found that monetary prizes have no impact on allocative efficiency and, as such, may appear to be superior to contract rights for providing incentives for innovation. The authors contend that the optimal mechanism rewards the innovator with a monetary prize when the buyer finds its project worthy of pursuing.

Researchers from Aalto University, Finland, conducted a case study on the challenges of nonprofit-funded prize competitions hosted on X Prize Foundation – an online portal that designs and manages innovation competitions to encourage scientific and technological development. In the study, the authors examine six major challenges and how the funder  has dealt with them. To address these issues, the authors provide some best practices and conclude that price competitions can be successful in spurring innovation if the funder takes a proper approach.

In an article on the university-based innovation competitions, the authors performed a case study analysis of the Convergence Innovation Competition at Georgia Tech. The authors conclude that two important aspects of innovation competition for university students are access to both business and technical mentorship. They also provide insight into other best practices and lessons learned.

Similar to the public discussion on innovation prize competitions, the recent academic research remains split on the effectiveness of prize competitions. However, some academic research confirms that price competitions can be successful in spurring innovation if the proper approach is taken. In these articles, the authors provide valuable lessons learned and best practice to help government and foundation funders to launch prize competitions that will receive high quality innovation that address societal and/or S&T needs.