Friday, October 2, 2015

Prizes as Incentives

There's a strand of the literature on the economics of intellectual property that argues, harking back to the Longitude Prize, which holds that prizes are better than patents as devices for stimulating invention and innovation.  Some argue, for example, that they have a lot of promise in drug development.  I am sceptical on that front - among other things I'd argue that the prize proposals underestimate the true cost of the development of a successful drug, since that cost includes the cost of all the blind alleys which research-based drug companies go down.  I'm also inclined to suspect that supporters of prizes in pharmaceutical development haven't considered how that approach would affect the development of competitors for the winning drug, or, more likely, that they don't believe that having a number of drugs targeting the same problem is a good thing.

There are, however, areas where I'd argue that prizes make a lot of sense, and that this is one of those areas.  I'd argue that it would have made a lot more sense had, say, the government of Ontario offered a prize for the development of a climate-friendly energy technology rather than pushing existing technologies with assorted subsidies.  Just because a technology exists doesn't mean that it's the best long run solution, but the more governments support existing technologies, the harder it is for new ones to gain a foothold, even if they're superior.  So if you think we need to reduce carbon emissions, impose a carbon tax and create a green-energy prize.