African Economic Conference • 13 Nov. 2009 • Addis Ababa, Ethiopia

1. New incentives for new agricultural technology development in AfricaWilliam A. MastersPurdue Universitywww.agecon.purdue.edu/staff/masterswww.ifpri.org/publication/accelerating-innovation-prize-rewards African Economic Conference • 13 Nov. 2009 • Addis Ababa, Ethiopia

2. Motivation:Why might new incentives be needed? • Why not just intellectual property rights (IPRs)? • succeeds only for excludableinnovations 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

3. A typology of innovation incentives Investor: Public or philanthropic Private for-profit (to avoid need for value capture) Examples: Instrument: Many government labs, or… grants and contracts to public and private institutions, universities and other agencies Many private labs, or… Novartis to UC Berkeley for plant biology (‘99-03); Chocolate makers to STCP for cocoa in West Africa (2000-present) Direct grants & contracts Ex-post payments and prizes X Prizes for space flight etc. (1996-present), AMC for new pneumococcal vaccine (launched June 2009) Eli Lilly and others on Innocentive (since 2001); Procter & Gamble etc. on NineSigma (since 2000) (to avoid need for project selection and supervision)

4. Philanthropic prizes have a long history (shown here: 1700-1930)

5. Philanthropic prizes have grown quickly (shown here: 1930-2009)

6. 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

7. …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

8. 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

9. 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

10. Proportional prizes complement other types of contest design Target is pre-specified Target is to be discovered Most technology prizes (e.g. X Prizes) Success is ordinal (yes/no, or rank order) 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) Success is cardinal (increments can be measured) Main role is as commitment device Main role is informational

11. How proportional prizes would workto 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

12. Implementing Proportional Prizes:Data requirements Data needed to compute each year’s economic gain from technology adoption D S S’ S” Price Variables and data sources (output gain) J Market data P National ag . stats. P,Q K Δ Q Field data (cost reduction) Yield change × adoption rate J Input change per unit I I Economic parameters (input change) Supply elasticity (=1 to omit) K Δ Demand elasticity (=0 to omit) Q Q Q’ Quantity

13. Implementing Proportional Prizes:Data requirements Data needed to estimate adoption rates across years Fraction of surveyed domain Other survey (if any) First survey Projection (max. 3 yrs.) Linear interpolations First release Year Application date

14. Implementing Proportional Prizes:Data requirements Computation of cumulative economic gains Discounted Value (US$) “Statute of limitations” (max. 5 yrs.?) Projection period (max. 3 yrs.?) Year First release NPV at application date, given fixed discount rate

15. Implementing Proportional Prizes: An example using case study data

16. 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

17. 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

18. For more information… wmasters@purdue.eduwww.agecon.purdue.edu/staff/masters www.ifpri.org/publication/accelerating-innovation-prize-rewards