NC-1034 meeting on
The Future of Agricultural Research:
Funding, Funding Mechanisms, and Public-Private Collaborations
March 15, 2012
Identifying and Rewarding Success
with Proportional Prizes
Will Masters
Friedman School of Nutrition, Tufts University
http://nutrition.tufts.edu
http://sites.tufts.edu/willmasters
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
• Diagnosis: Ag R&D is constrained by asymmetric information
– Funders cannot observe impact directly; they see only impact claims
– Innovators have access to more data, but little incentive to reveal it
– This is Akerlof’s market for lemons
• Remedy: An incentive to reveal hidden information
– A type of quality certification, to elicit outcome data for third-party audit
– A type of contest, to attract participants and reveal relative performance
• Today: Design and performance of proportional prize contests
– Typology and motivation for the new design
– Performance in laboratory experiments
• A “real effort” experiment, with endogenous entry (J. of Public Economics 2010)
• A “chosen effort” experiment, with equilibrium benchmarks (submitted March 2012)
– Specification of a proportional prize contest for agricultural R&D
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
• Why not just intellectual property rights (IPRs)?
– Well suited for proprietary, excludable innovations, with value capture
…but not for non-excludable, public services
• Why not just grants & contracts?
– Well suited for both private and public services, of predictable value
…but not for services where the preferred vendor is unknown
• Why not conventional contests?
– Well suited for discrete breakthroughs, with one or few winners
…but ag involves many sequential, location-specific, cumulative successes
• The proposed new contest design would:
– Specify how impact is to be measured, then audit and reward results
– Offer artificial market-like incentive, proportional to measured success
– Mimic stock markets, other real-life competition with market share
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
A typology of innovation incentives
Investor:
Private forprofit
(to avoid need for
value capture)
Instrument:
Direct
grants &
contracts
Ex-post
payments
and prizes
(to avoid need for project
selection and supervision)
Public or
philanthropic
Many private labs, or…
Novartis, BP to UC Berkeley;
Chocolate makers to STCP
for cocoa in West Africa
Many government labs, or…
grants and contracts to public
and private
institutions,
universities and
other agencies
Eli Lilly and others on
Innocentive (since 2001);
Procter & Gamble etc. on
NineSigma (since 2000)
X Prizes for space flight etc. (1996- ),
AMC for new pneumococcal vaccine
(launched June 2009)
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Philanthropic prizes have a long history
(shown here: 1700-1930)
Net present value of
prizes paid
French Academy of Sciences
Montyon prizes for medical challenges
(2006 US dollars,
not to scale)
$51,118,231
Deutsch Prize for flight between the
Aero-Club de France and Eiffel Tower
British Longitude prize for
determining longitude at sea
$12,600,000
The Daily Mail prize for flight
$5,997,097
across the English Channel
$3,364,544
French government prize for
food preservation techniques
$1,045,208
Hearst prize for crossing
continental US in 30 days
French government prize for
large scale hydraulic turbine
French government prize
for producing alkali soda
$421,370
$644,203
Milan Committee prize
for flight across Alps
$618,956
$582,689
The Daily Mail prize for transatlantic flight
$515,770
$289,655
Chicago Times-Herald prize for motors for
self-propelling road carriage
$123,833
Scientific American prize for first plane in US to fly 1 km
$56,502
Wolfskehl prize for proof of Fermat’s Last Theorem
1700
1750
1800
1850
Orteig prize for solo
flight NY to Paris
1900
$31,690
1930
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Philanthropic prizes have grown quickly
(shown here: 1930-2009)
Net present value of prizes paid
(2006 US dollars, not to scale)
Advance market Commitment for pneumococcal disease vaccine up to $1.5 billion
Soviet Incentive Awards
For Innovative Research
Bigelow Space Prize for crew transport into orbit $ 50,000,000
Super Efficient Refrigerator Program for
highly efficient CFC free refrigerator
$165,755,396
$37,682,243
Virgin Earth Challenge for removal of greenhouse gases $ 25,000,000
European Information and Communication Technology Prize
$ 10,917,192
Ansari X Prize for private manned space flight $ 10,717,703
Archon X Prize for sequencing the human genome $ 10,000,000
$7,000,000
Millennium Math Prizes for seven unsolved problems
DARPA Grand Challenge for robotics in vehicles
$6,660,406
$6,000,000
Lemelson-MIT Prize for invention of a patented product useful to society
$4,300,000
Methuselah Mouse Prize for demonstration of slowing of ageing process on mouse
NASA Centennial Challenges for Improvements in space exploration
$2,000,000
$1,882,290
Schweighofer Prize for Europe’s forest industry competitiveness
$1,600,000
International Computer Go Championship
$1,210,084
Budweiser Challenge for first non-stop balloon flight around the globe
$1,210,084
Rockefeller Foundation Prize for Rapid STD Diagnostic Test
$1,210,084
Grainger Challenges for development of economical filtration devices for the
removal of arsenic from well water in developing countries
$588,092
Kremer Prize for Human Powered Flight
Across the English Channel
Kremer Prize for Human
Powered Flight (Figure 8)
$290,153
Feynman Prizes for nano
tech robot technology
$250,000
$59,240
1940
CATS Prize for inexpensive commercial launch of payload into space
$654,545
$250,000
Electronic Frontier Foundation Cooperative Com$50,000-250,000
puting Challenge for new large prime numbers
Beal’s
$128,489
Fredkin Prize for Chess Computer Program
Conjecture Prize
$100,000
Loebner Prize for Computer that
can pass the Turing Test
$100,000
Polytechnische Gesellscaft Prize
for Human Powered Flight
1930
Goldcorp Challenge for best gold
prospecting methods or estimates
1950
1960
1970
1990
2000
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
A typology of contest designs
Target is
pre-specified
Success is ordinal
(yes/no, or
rank order)
Success is cardinal
(increments can
be measured)
Target is to be
discovered
Traditional prizes
(e.g. X Prizes)
Achievement awards
(e.g. Nobel Prizes, etc.)
AMC for medicines,
COD for schooling
(fixed price per unit)
Proportional prizes
(fixed sum divided in
proportion to impact)
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Experiment #1
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Subjects solved arithmetic problems as quickly and accurately
as possible, choosing how they want to be paid.
Table 1. Contest results under piece-rate (PR), winner-take-all (WTA) and
proportional-prize (PP) payments, with endogenous entry
Start with piece
rate to see skill
Then offer
contests, either
traditional WTA
or proportional
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Offering proportional contests not only increased entry
and total performance, but also reduces inequality
Winner-Take-All Contests
Lost
Did not enter
Won
Proportional Prize Contests
Distribution
includes
entrants and
non-entrants
Results shown are for 207 contests involving 69 subjects
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Experiment #2
• A “chosen effort” contest between two symmetric players, so can solve for equilibrium in:
• winner-take-all contests won by the best performer,
• winner-take-all lotteries where odds of success are proportional to performance, and
• proportional-prize contests with rewards shared in proportion to performance.
• Performance depends on both effort and random noise to reflect imperfect information:
• outcome (𝑦𝑖 ) depends on both effort and noise: 𝑦𝑖 (𝑒𝑖 |𝜀𝑖)=𝑒𝑖𝜀𝑖
• noise (𝜀) is uniformly distributed on the interval [1−𝑎,1+𝑎], 𝑎∈[0,1]
• success (𝑝𝑖 ) is relative to other contestants: 𝑝𝑖 (𝑒𝑖,𝑒j|𝜀𝑖,𝜀 j)=𝑦𝑖𝑟/(𝑦𝑖𝑟+𝑦 j 𝑟)
• payoff (𝜋𝑖 ) depends on the value of prize (v) and cost of effort: 𝐸(𝜋𝑖)=𝑝𝑖𝑣−𝑐(𝑒𝑖)
• The three forms of competition are special cases of the success function
• Traditional WTA contest if r=∞
• “Tullock” WTA lottery if r=1 and pi is probability of winning a lump-sum prize
• Proportional prize contest if r=1 and pi is share of the prize that is won
• With uniform noise and quadratic costs [𝑐(𝑒)=𝑒2/𝑏], we can
• solve for pure strategy equilibria, and compare to laboratory behavior
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Proportional contests elicit more realistic behavior,
less optimism bias
Table 1: Experimental Parameters and Equlibrium Predictions
Treatment
Value of the Prize, 𝑣
Noise Parameter, 𝑎
Equilibrium Effort, 𝑒 ∗
Expected Payoff, 𝐸 𝜋 ∗
DET-L
100
0.5
70.7
0.0
DET-H
100
1
50.0
25.0
PROB-L
100
0.5
34.6
38.0
PROB-H
100
1
31.1
40.3
PP-L
100
0.5
34.6
38.0
PP-H
100
1
31.1
40.3
Table 2: Observed Average Efforts and Payoffs (144 subjects, 2880 rounds)
Treatment
DET-L
DET-H
Equilibrium
Average
Median
St. Dev.
70.7
62.4
65.0
20.9
50.0
51.2
50.0
17.4
Equilibrium
Average
Median
St. Dev.
0.0
6.7
0
47.1
25.0
20.8
0
49.0
PROB-L PROB-H
Effort
34.6
31.1
51.3
46.1
51.0
47.0
20.0
17.2
Payoff
38.0
40.3
19.7
25.8
0
0
49.7
49.5
PP-L
PP-H
34.6
45.2
45.0
15.6
31.1
42.4
41.3
17.8
38.0
27.1
27.6
16.5
40.3
28.9
28.4
27.2
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
How proportional prizes would work
in African agriculture
• Donors offer a given sum (e.g. $1 m./year), to be divided among all
successful new technologies
• Innovators assemble data on their technologies
– controlled experiments for output/input change
– adoption surveys for extent of use
– input and output prices
• Secretariat audits the data and computes awards
• Donors disburse payments to the winning portfolio of techniques, in
proportion to each one’s impact
• Investors, innovators and adopters use prize information to scale up
spread of winning techniques
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Implementing Proportional Prizes:
Data requirements
Data needed to compute each year’s
economic gain from technology adoption
Price
D
S
S’
S”
Variables and data sources
J (output gain)
P
K
(cost reduction)
ΔQ
Field data
Yield change × adoption rate
J
Input change per unit
I
I
Economic parameters
Supply elasticity (=1 to omit)
K
Δ Q Demand elasticity (=0 to omit)
(input change)
Q
Market data
P,Q National ag . stats.
Q’
Quantity
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Implementing Proportional Prizes:
Data requirements
Data needed to impute each year’s
adoption rate
Fraction of
surveyed
domain
Other survey
(if any)
First
survey
Projection (max. 3 yrs.)
Linear
interpolations
First release
Application date
Year
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Implementing Proportional Prizes:
Data requirements
Calculation of NPV over past and future years
Discounted
Value
(US$)
“Statute of
limitations”
(max. 5 yrs.?)
First release
Projection
period
(max. 3 yrs.?)
Year
NPV at application date,
given fixed discount rate
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Hypothetical results of a West African contest
Example results using case study data
Example technology
1. Cotton in Senegal
Measured
Social Gains
(NPV in US$)
Measured
Social Gains
(Pct. of total)
Reward
Payment
(US$)
14,109,528
39.2%
392,087
2. Cotton in Chad
6,676,421
18.6%
185,530
3. Rice in Sierra Leone
6,564,255
18.2%
182,413
4. Rice in Guinea Bissau
4,399,644
12.2%
122,261
5. “Zai” in Burkina Faso
2,695,489
7.5%
74,904
6. Cowpea storage in Benin
1,308,558
3.6%
36,363
231,810
0.6%
6,442
$35.99 m.
100%
$1 m.
7. Fish processing in Senegal
Total
Note: With payment of $1 m. for measured gains of about $36 m., the implied
royalty rate is approximately 1/36 = 2.78% of measured gains.
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Opportunity for a single-country trial in Ethiopia
New technology adoption is stalled:
Share of cropped area under new seeds for major cereal grains, 1996-2008
Source: Ethiopian Central Statistical Agency data, reprinted from D.J. Spielman, D. Kelemework and D. Alemu (forthcoming), “Seed, Fertilizer,
and Agricultural Extension in Ethiopia.” Draft chapter for P. Dorosh, S. Rashid, and E.Z. Gabre-Madhin, eds., Food Policy in Ethiopia.
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
Opportunity for a single-country trial in Ethiopia
Adoption is especially slow for seeds:
Number and proportion of farm holders applying new inputs, by education
Proportion of farms using new inputs:
No. of farms
Fert.
Impr. Seed
Pesticide
Irrigation
12,916,120
44%
12%
24%
8%
Illiterate
8,239,615
41%
10%
22%
8%
Informally educated
1,016,284
48%
13%
23%
12%
Some formal education
3,660,222
51%
16%
30%
8%
All farm holders
Of whom:
Source: Author's calculations, from CSA (2010), “Agricultural Sample Survey 2009-2010 (2002 E.C),
Meher Season.” Version 1.0, 21 July 2010. Addis Ababa: Central Statistical Authority of Ethiopia.
Available online at http://www.csa.gov.et/index.php?&id=59.
Identifying and Rewarding Success with Proportional Prizes
Motivation| Experimental Results | Application
In conclusion…
• Diagnosis: Ag R&D is constrained by asymmetric information
– Funders cannot observe impact directly; they see only impact claims
– Innovators have access to more data, but no incentive to reveal it
– This is Akerlof’s market for lemons
• Remedy: An incentive to reveal hidden information
– A type of quality certification, to elicit outcome data for third-party audit
– A type of contest, to attract participants and reveal relative performance
• Today: Design and performance of proportional prize contests
– Typology and motivation for the new design
– Performance in laboratory experiments
• A “real effort” experiment, with endogenous entry (J. of Public Economics 2010)
• A “chosen effort” experiment, with equilibrium benchmarks (submitted March 2012)
– Specification of a proportional prize contest for agricultural R&D
Well-designed prize contests
offer very powerful incentives
• By “well-designed prizes”, we mean:
– An achievable target, an impartial judge, credible commitment to pay
• Such prizes elicit a high degree of effort:
– Typically, entrants collectively invest much more than the prize payout
– Sometimes, individual entrants invest more than the prize
• e.g. the Ansari X Prize for civilian space travel offered to pay $10 million
• the winners, Paul Allen and Burt Rutan, invested about $25 million
• Why do prizes attract so much investment?
– contest provides a credible signal of success
– so winners can sell their product more easily
• the X Prize winners licensed designs to Richard Branson for $15 million
• and eventually sold the company to Northrop Grumman for $??? million
• total public + private investment in prize-winning technologies ~ $1 billion
…but traditional prize contests
have serious limitations!
• Traditional prize contests are winner-take-all (or rank-order)
– this is inevitable when only one (or a few) winners are needed, but...
• Where multiple successes could coexist, imposing winner-take-all
payoffs introduces inefficiencies
– strong entrants discourage others
• potentially promising candidates will not enter
– pre-specified target misses other goals
• more (or less) ambitious goals are not pursued
– focusing on few winners misses other successes
• characteristics of every successful entrant might be informative
• New incentives can overcome these limitations with more
market-like mechanisms, that have many winners
New pull mechanisms
allow for many winners
• From health and education, two examples:
– pilot Advance Market Commitment for pneumococcal disease vaccine
• launched 12 June 2009, with up to $1.5 billion, initially $7 per dose
– proposed “cash-on-delivery” (COD) payments for school completion
• would offer $200 per additional student who completes end-of-school exams
• What new incentive would work for agriculture?
– what is the desired outcome?
• unlike health, we have no silver bullets like vaccines
• unlike schooling, we have no milestones like graduation
• instead, we have on-going adoption of diverse innovations in local niches
– what is the underlying market failure?
• for AMC and COD, the main problem is making commitments
• for agriculture, the main problem is learning what works, where
– Innovations are location-specific; investors cannot observe success directly
What new incentives could best
reward new agricultural technologies?
• New techniques from elsewhere did not work well in Africa
– local adaptation has been needed to fit diverse niches
– new technologies developed in Africa are now spreading
• Asymmetric information limits scale-up of successes
– local innovators can see only their own results
– donors and investors try to overcome the information gap with project selection,
monitoring & evaluation, partnerships, impact assessments…
– but outcome data are rarely independently audited or publically shared
• The value created by ag. technologies is highly measureable
– gains shown in controlled experiments and farm surveys
– data are location-specific, could be subject to on-side audits
• So donors could pay for value creation, per dollar of impact
– a fixed sum, divided among winners in proportion to measured gains
– like a prize contest, but all successes win a proportional payment