A Theory of Grand Innovation Prizes

54 Pages Posted: 15 Feb 2017

See all articles by Alberto Galasso

Alberto Galasso

University of Toronto - Rotman School of Management; University of Toronto - Strategic Management

Matthew F. Mitchell

Rotman School of Management

Gabor Virag

University of Toronto - Rotman School of Management

Date Written: February 13, 2017

Abstract

The past decade has witnessed a resurgence in innovation awards, in particular of Grand Innovation Prizes (GIPs) which are rewards to innovators developing technologies reaching performance goals and requiring breakthrough solutions. GIPs typically do not preclude the winner also obtaining patent rights. This is in stark contrast with mainstream economics of innovation theories where prizes and patents are substitute ways to generate revenue and encourage innovation. Building on the management of innovation literature which stresses the difficulty to specify exante all the technical features of the winning technologies, we develop a model in which innovative effort is multi-dimensional and only a subset of innovation tasks can be measured and contracted upon. We show that in this environment patent rights and cash rewards are complements, and that GIPs are often preferable to patent races or prizes requiring technologies to be placed in the public domain. Moreover, our model uncovers a tendency for patent races to encourage speed of discovery over quality of innovation, which can be corrected by GIPs. We explore robustness to endogenous entry, costly public funds, and incomplete information by GIP organizers on the surplus created by the technology.

Suggested Citation

Galasso, Alberto and Mitchell, Matthew F. and Virag, Gabor, A Theory of Grand Innovation Prizes (February 13, 2017). Rotman School of Management Working Paper No. 2916815, Available at SSRN: https://ssrn.com/abstract=2916815 or http://dx.doi.org/10.2139/ssrn.2916815

Alberto Galasso (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/facbios/viewFac.asp?facultyID=alberto.galasso

University of Toronto - Strategic Management ( email )

105 St George Street
Toronto, ON M5S 1L2
Canada

Matthew F. Mitchell

Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada

Gabor Virag

University of Toronto - Rotman School of Management ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada
416-978-4423 (Phone)

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