HOW EFFECTIVE ARE PRIZES AS INCENTIVES TO INNOVATION? EVIDENCE FROM THREE 20 TH CENTURY CONTESTS

Abstract

Most work in the economics literature on prizes as incentives to innovation focuses on their comparative incentive effects (e.g. Wright 1983, Shavell and Ypersele, 2001, Gallini and Scotchmer, 2001) or their theoretical design where market failure leaves little alternative to prizes as incentives (e.g. Kremer, 2000; Kremer and Zwane, 2002; Masters, 2003), in an effort to predict the economic effects of prizes. Our approach differs from this work by taking a case-based retrospective view. The paper explores the role and incentive effects of prizes in three twentieth century innovations where prizes were important – motorized flight, human-powered flight, and energy efficient refrigerators. We review the historical evidence in light of the current theoretical contributions, and suggest possible areas of future investigation.

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