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Wednesday, February 09, 2011


 This is the link to the pdf report by Liam Brunt, Josh Lerner and Tom Nicholas of Harvard on the use of prizes from 1839 to 1939 by the Royal Agricultural Society of England (RASE) to promote innovation. May sound dry as dust but it allows an extensive and long lasting examination of whether prizes work, even in this case remarkably small prizes. It also shows what a drain unduly expensive patenting bureaucracy has been. Here is the very short version:

"At annual shows the RASE held competitive trials and awarded medals and monetary prizes (exceeding one million pounds in current prices) to spur technological development. We find large effects of the prizes on contest entries, especially for the Society’s gold medal. Matching award and patent data, we also detect large effects of the prizes on the quality of contemporaneous inventions.          p3

It awarded both substantial monetary prizes (in excess of £1 million in current prices) and its own highly prestigious medals for innovative implements and machinery. Between 1839 and 1939, 15,032 entrant inventions competed for the prizes and a total of 1,986 awards were made.       p6

prize winners were significantly more likely to utilize the patent system after the show than nonprize
winners. Crucially, we find that the largest spike in patenting for both groups of inventors occurred in the year of the show (i.e., approximately a year after the prizes were announced), suggesting that the relationship between prizes and patenting was quite immediate.       p8

we estimate that a doubling in monetary prize value equates to approximately a 6 to 7 percent increase in patents in the target area in the year of the show. For an additional medal, we find a quantitatively much larger increase of 33 percent. These findings are robust to control variables and for dynamic specifications of the patent regressions.              p9

our results provide at least two pieces of evidence to show that prizes spur innovation. First, the contests organized by the RASE attracted large numbers of inventors so the prizes did act as an important inducement incentive. Second, the prizes were correlated with patenting activity in the priority areas with an especially large effect on the quality of invention.        p10

Our analysis of the prize system also sheds light on why inducement prizes worked, from the perspectives of both the entrants and the RASE. The monetary awards did not offset all the costs of technological development, covering on average only around one third of the sale price of a single unit of an implement or machine exhibited by a successful entrant. But exhibiting an innovation was a powerful form of advertising and winning a prize could dramatically reinforce this effect as the prizes bestowed upon inventors “the Society’s mark of approval” (Jenkins, 1878, p.870) and augmented potential market size. From the point of view of the RASE, the awards encouraged competition through entry into the target areas and also the diffusion of useful knowledge across innovators. While costly to organize, the evidence suggests that the prizes led to significant improvements in the quality of technological invention.        p11

Whereas its predecessors were distracted by politics, which hampered their ability to focus on the technical
and scientific aspects of farming, the RASE was a politically agnostic organization       p12

Trials were expensive to operate. In 1878 it was estimated that the trials cost £2,000 per annum (Jenkins, 1878, p. 871-872), while in 1920 the tractor trials alone cost the Society almost £5,000 (Scott Watson, 1939, p. 102). In fact, the cost of the trials was a very considerable burden on the finances of the RASE, whose only sources of income were the annual subscriptions paid by its members and the gate money arising from the annual show.                  p14

By the middle of the nineteenth century, rolling in extraneous expenses, a patent could cost £120 in England and as much as £350 in Scotland             p15

in 1925 it was still ten times more expensive to carry a patent to full term in Britain than in the United States

In 1855 dissenting manufacturers authored a report stating: “We object to this system [of prizes] on the ground that it operates as an undue stimulus to competition.”  In 1856 one manufacturer commented on the apparent “destructive” side of the prize competitions: “It is unfair because there will always be sure to be somebody trying to find out some improvement or other and there is no knowing where will be the end to it.”     p16

the prize awards against the sale prices of the winning implements, revealing a slope coefficient of 0.3. Although measurement error in the RASE price estimates will bias the coefficient downwards, the fact that
the prize value was significantly less than the value of the exhibit is supported by records from the shows. A report of the stewards of implements for 1848 states that, “the implement makers are unanimous in declaring that, even when successful, the prizes they receive do not reimburse them for their expenses and loss of time”         p20

shows the large effect of the 1883 [Patent]Act, which reduced the costs of obtaining a patent      p23

winners were significantly more likely than non-winners to increase their patenting activity after the show              p29

the effect of a gold medal is economically large and statistically significant at the five percent level, implying a 42 percent increase in patent counts in technology categories  targeted by the award        p34

For a doubling of monetary awards, the estimates in column 5 imply a 7 percent increase in patents for which a renewal fee was paid and a 33 percent increase for an additional medal.       p36

at least part of the boost in patenting is due to inventors switching from pursuing other technologies to the one for which the prize is being offered.         p37

our analysis suggests that inducement prizes – especially non-pecuniary inducement prizes – can be extremely effective at encouraging innovation. Interestingly, we find that entrant effects are largest for prestigious medals, suggesting that the role of the awards in recovering the costs of research and development was quite limited. The average monetary award offered by the RASE covered only around one-third of the estimated
sale price of a winning invention exhibited. The prizes, the evidence suggests, induced competition between inventors and increased the quality of innovation, while the advertising benefits associated with the prizes likely increased potential market size. Our quantitative evidence on the utility of the prize system is also supported qualitatively. The Scientific American concluded in 1867: “It is indisputable that these competitive trials have done, and are doing, much to raise agricultural engineering to the highest standards of efficiency and economy.” With respect to steam engines, which had the largest impact on productivity growth of any technology in the mid-to-late nineteenth century (Crafts,2004), the role of the RASE was again noted by the Scientific American in 1874: “An investigation of the results obtained from year to year shows a most extraordinary improvement in the engines, as regards economy and workmanship, and there is little doubt that the effect of these tests has been most beneficial to the users of steam power.” An 1864 report by the Society of Arts noted: “Without the prize system the manufacturers would not have been guided to the production of the class of implements really required.” We believe the prize contests organized by the RASE offer valuable guidance for the design of inducement awards today, since there is a reluctance to introduce a radical change in the incentives for innovation in the absence of hard empirical support (Kremer, 1998, pp. 1162-1165; NRC, 2007). While the administrative costs associated with a prize system may be high –

graphs and tables     p44 on

  So prizes work. Perhaps no surprise there since even opponents back in 1855 accepted it, but worth having it proven. Incidentally in all the time I have been pushing this the complaint that we will "not know the end of improvements" is the sole case I have seen of anybody being willing to say why they are against it. Normally politicians, bureaucrats and journalists just ignore the facts and pretend never to have heard of the idea.

Note how very small these prizes were since the RASE were not government funded or have a rich sponsor. 1986 prizes awarded over a century for £1 million in today's money that comes to just over £500 each. If a doubling of that implies a 7% increase in patentable ideas a 100% increase  might cost £7,000 and John McCain's $300 million for an improved battery would produce a 27,000 fold increase. OK I am playing with figures since a new battery is far more difficult than a new seed drill and in any case much larger prizes would be expected to involve the Law of Diminishing Returns but nonetheless the utility of using prizes rather than bureaucracy to stimulate innovation seems beyond any dispute.

Unless you are a politician or bureaucrat whose objective is not progress but the power to dispense patronage, or a journalist receiving it and even they don't actually dispute it. Fortunately businessmen willing to oppose progress, at least openly, now seem an extinct breed.      

     "“Whoever makes two ears of corn, or two blades of grass to grow where only one grew before, deserves better of mankind, and does more essential service to his country than the whole race of politicians put together”    Jonathan Swift

     Generations of RASE officials and engineers deserve our thanks.

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