New incentives for
new agricultural technology
development in Africa
William A. Masters
Purdue University
www.agecon.purdue.edu/staff/masters
www.ifpri.org/publication/accelerating-innovation-prize-rewards
African Economic Conference • 13 Nov. 2009 • Addis Ababa, Ethiopia
Motivation:
Why might new incentives be needed?
• Why not just intellectual property rights (IPRs)?
– succeeds only for excludable innovations that can be sold
– gains from adoption may flow to consumers and other users
• Why not just grants & contracts?
– succeeds only for known services that can be bought
– procurement of R&D may face asymmetric information and other
problems in project selection, supervision, and management
• Market-like “pull” mechanisms can help
– allow donors to pay for results, after achievement occurs
– the most familiar ex-post payment scheme is a prize contest
A typology of innovation incentives
Investor:
Private
for-profit
Public or
philanthropic
(to avoid need for
value capture)
Instrument:
Direct
grants &
contracts
Ex-post
payments
and prizes
(to avoid need for
project selection
and supervision)
Many private labs, or…
Novartis to UC Berkeley
for plant biology (‘99-03);
Chocolate makers to
STCP for cocoa in West
Africa (2000-present)
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-present),
AMC for new pneumococcal
vaccine (launched June 2009)
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
$12,600,000
Aero-Club de France and Eiffel Tower
British Longitude prize for
determining longitude at sea
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 day
French government prize for
large scale hydraulic turbine
French government prize $421,370
for producing alkali soda
$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
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
1930
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
CATS Prize for inexpensive commercial launch of payload into space
$654,545
Feynman Prizes for nano
tech robot technology
$250,000
$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
$59,240
1940
Goldcorp Challenge for best gold
prospecting methods or estimates
1950
1960
1970
1980
1990
2000
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 tournaments with consolation prizes)
– 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
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
Proportional prizes complement
other types of contest design
Target is
pre-specified
Success is
ordinal
(yes/no, or
rank order)
Success is
cardinal
(increments can
be measured)
Target is to be
discovered
Most technology 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)
How proportional prizes would work
to accelerate innovation
• Donors offer a given sum (e.g. $1 m./year), to be divided
among all successful new technologies
• Innovators assemble data on their technologies
– controlled experiments for output/input change
– adoption surveys for extent of use
– input and output prices
• Secretariat audits the data and computes awards
• Donors disburse payments to the winning portfolio of
techniques, in proportion to each one’s impact
• Investors, innovators and adopters use prize information
to scale up spread of winning techniques
Implementing Proportional Prizes:
Data requirements
Data needed to compute each year’s
economic gain from technology adoption
Price D
S
S’
S”
Variables and data sources
J (output gain)
P
K ΔQ
(cost reduction)
Field data
Yield change×adoption rate
J
Input change per unit
I
I
(input change)
Q
Market data
P,Q National ag. stats.
Q’
Economic parameters
K Supply elasticity (=1 to omit)
ΔQ Demand elasticity (=0 to omit)
Quantity
Implementing Proportional Prizes:
Data requirements
Data needed to estimate
adoption rates across years
Fraction of
surveyed
domain
First
survey
Other survey
(if any)
Projection (max. 3 yrs.)
Linear
interpolations
First
release
Application
date
Year
Implementing Proportional Prizes:
Data requirements
Computation of cumulative economic gains
Discounted
Value
(US$)
“Statute of
limitations”
(max. 5 yrs.?)
First
release
Projection
period
(max. 3 yrs.?)
Year
NPV at application date,
given fixed discount rate
Implementing Proportional Prizes:
An example using case study data
Measured
Social Gains
(NPV in
US$)
Measured
Social Gains
(Pct. of total)
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%
$1 m.
Example technology
1. Cotton in Senegal
7. Fish processing in Senegal
Total
Reward
Payment
(US$)
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.
In summary…
• New payment incentives can be helpful
– when funders can specify outcome but not method
• Proportional payments can be used…
– when increments of achievement can be measured
– to discover and reward all kinds of achievement
• Outcome of proportional prizes would be:
– a portfolio of winners, each paid its share of gains
– a visible guide to what works, where and when to
attract additional investors and adopters
Implementing proportional prizes:
What’s done, what’s next
• Refinement and endorsement of the initiative
– 3 journal articles, 21 presentations since 2003
– 9-member Advisory Board formed October 2004
– FARA as potential Africa secretariat since Sept. 2005
• Funding for concept development
– Adelson Family Foundation, 2004-06
– International Food Policy Research Institute, 2006-08
• Funding for prize rewards
– could be single or multidonor, e.g. through CAADP
For more information…
wmasters@purdue.edu
www.agecon.purdue.edu/staff/masters
www.ifpri.org/publication/accelerating-innovation-prize-rewards