Identifying and Rewarding Success with Proportional Prizes

1. NC-1034 meeting on The Future of Agricultural Research: Funding, Funding Mechanisms, and Public-Private Collaborations Identifying and Rewarding Success with Proportional Prizes March 15, 2012 Will Masters Friedman School of Nutrition, Tufts University http://nutrition.tufts.edu http://sites.tufts.edu/willmasters

2. 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

3. 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

4. Identifying and Rewarding Success with Proportional Prizes • Motivation| Experimental Results | Application 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, BP to UC Berkeley; Chocolate makers to STCP for cocoa in West Africa Direct grants & contracts Ex-post payments and prizes X Prizes for space flight etc. (1996- ), 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)

5. Identifying and Rewarding Success with Proportional Prizes • Motivation| Experimental Results | Application (shown here: 1700-1930) Philanthropic prizes have a long history

6. Identifying and Rewarding Success with Proportional Prizes • Motivation| Experimental Results | Application (shown here: 1930-2009) Philanthropic prizes have grown quickly

7. Identifying and Rewarding Success with Proportional Prizes • Motivation| Experimental Results | Application A typology of contest designs Target is pre-specified Target is to be discovered Traditional 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

8. Identifying and Rewarding Success with Proportional Prizes • Motivation| Experimental Results | Application Experiment #1

9. 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

10. 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 Proportional Prize Contests Winner-Take-All Contests Lost Won Distribution includes entrants and non-entrants Did not enter Results shown are for 207 contests involving 69 subjects

11. 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

12. 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 EqulibriumPredictions Table 2: Observed Average Efforts and Payoffs (144 subjects, 2880 rounds)

13. Identifying and Rewarding Success with Proportional Prizes • Motivation| Experimental Results | Application How proportional prizes would workin 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

14. 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 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

15. 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 Year Application date

16. 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.?) Projection period (max. 3 yrs.?) Year First release NPV at application date, given fixed discount rate

17. Identifying and Rewarding Success with Proportional Prizes • Motivation| Experimental Results | Application Hypothetical results of a West African contest Example results using case study data

18. 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.

19. 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:

20. 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

22. 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

23. …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

24. 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

25. 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