Innovation Sticks: The Limited Case for Penalizing Failures to Innovate

Abstract

When policymakers and academics think about designing optimal innovation incentives, they almost exclusively limit their considerations to alternative types of reward incentives. But in this article, we show that under specific circumstances innovation sticks – potential penalties for failure to innovate – can play a valuable role in our innovation policy, either alone or in conjunction with innovation carrots. What’s more, we provide examples of several innovation sticks that already have been used with apparent success, including the Federal Corporate Average Fuel Economy (CAFE) standards. Finally, we apply our approach to a new area to which we think innovation sticks may be well-suited: the problem of car fatalities. Our model suggests that a relatively simple system of yardstick penalties could help reduce national auto fatalities by as much 20%, simply by bringing laggard entities (companies and states) up to the median.