Why Washington should embrace innovation prizes

July 30, 2010

Innovation prizes put space tourism on the launch pad and helped Netflix better predict consumer movie preferences. Now they might even improve oil spill cleanup. Government should join in, too. In austere times, such rewards would be an efficient way for cash-strapped Washington to fund breakthroughs that drive economic growth.

Competitive prizes do have a successful history. In 1714, the British Parliament offered a £20,000 prize for anyone who could devise a way for sailors to accurately determine a ship’s longitude. It was eventually won by an English carpenter. In 1927, Charles Lindbergh won $25,000 from hotelier Raymond Orteig for his nonstop flight from New York to Paris. The $1 million Netflix Prize was decided in 2009 after a competition involving teams from more than 100 countries.

It was Lindbergh’s historic feat that inspired astronaut wannabe Peter Diamandis to start the X Prize Foundation in 1996. Its first award was pinned to space flight in 2004, and the organization has started a new one in response to the BP oil leak in the Gulf.

What attracted Diamandis to prizes is how they create leverage. Competitors for the Orteig Prize raised and spent some $400,000, while X-Prize teams poured in $100 million in the hopes one would win $10 million. Spending more than the actual prize money on offer enforces economic discipline, as it means the innovators need to consider a back-end business application to recoup their funds.

The first X Prize was financed by an insurer betting against its success. Scrounging up the dough for what Diamandis calls “mega-prizes” in the $100 million-to-$1 billion range would be even tougher. That’s where government can pitch in. Washington already dabbles, especially for defense research. But their use could be greatly expanded.

In the U.S., Congress should start by passing a bill now under consideration that would authorize all federal departments and agencies to use prizes. It’s supported by the White House, even though President Barack Obama was sort of dismissive of prizes during his campaign. (Back then, he didn’t think much of John McCain’s plan for a $300 million prize to create advanced battery technology.) But one of his top science advisers is Thomas Kalil, a big advocate of the idea.  And the administration has incorporated the concept into its national innovation strategy. Eventually the government could even finance “grand challenges” such as developing self-replicating nanotechnology machines or faster-than-light communications.

The key is to focus on areas where there is an identifiable market failure, or where success seems near impossible. If history is a reliable guide, private money could outmatch public expenditure by 10-to-one. That is an opportunity penny pinching politicians anywhere would be silly to pass up.

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