Identifying and Rewarding Success with Proportional Prizes Will Masters Friedman School of...

Identifying and Rewarding Success with Proportional Prizes

Will MastersFriedman School of Nutrition, Tufts University

http://nutrition.tufts.eduhttp://sites.tufts.edu/willmasters

NC-1034 meeting on The Future of Agricultural Research:

Funding, Funding Mechanisms, and Public-Private Collaborations

March 15, 2012

• 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

Identifying and Rewarding Success with Proportional PrizesMotivation| 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


Many government labs, or…grants and contracts to public and private institutions, universities and other agencies

A typology of innovation incentives

(to avoid need for project selection and supervision)

Many private labs, or… Novartis, BP to UC Berkeley; Chocolate makers to STCP for cocoa in West Africa

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)

Private for-profit

Public or philanthropic

Direct grants & contracts

Ex-post payments and prizes

Investor:

Instrument:

Examples:(to avoid need for value capture)


1700 1930

British Longitude prize for determining longitude at sea

French government prize for producing alkali soda

1800 1750

French government prize for food preservation techniques

1900

French Academy of Sciences Montyon prizes for medical challenges

French government prize for large scale hydraulic turbine

Chicago Times-Herald prize for motors for self-propelling road carriage

Deutsch Prize for flight between the Aero-Club de France and Eiffel Tower

Scientific American prize for first plane in US to fly 1 km

Wolfskehl prize for proof of Fermat’s Last Theorem

The Daily Mail prize for flight across the English Channel

Milan Committee prize for flight across Alps

The Daily Mail prize for transatlantic flight

Hearst prize for crossing continental US in 30 days

Orteig prize for solo flight NY to Paris

$3,364,544

$421,370

$1,045,208

$51,118,231

$644,203

$123,833

$12,600,000

$56,502

$31,690

$5,997,097

$618,956

$515,770

$582,689

$289,655

Net present value of prizes paid

(2006 US dollars, not to scale)

1850

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


1940 1950 1960 1970 1980 1990 2000

Kremer Prize for Human Powered Flight (Figure 8)

$290,153

Kremer Prize for Human Powered Flight Across the English Channel

$588,092

Fredkin Prize for Chess Computer Program $128,489

1930

Polytechnische Gesellscaft Prize for Human Powered Flight

$59,240

Soviet Incentive Awards For Innovative Research

$165,755,396

Loebner Prize for Computer that can pass the Turing Test

$100,000

$1,210,084 Budweiser Challenge for first non-stop balloon flight around the globe

$250,000

CATS Prize for inexpensive commer-cial launch of payload into space

International Computer Go Championship

$100,000

Beal’s Conjecture Prize

$654,545

Electronic Frontier Foundation Cooperative Com-puting Challenge for new large prime numbers

Goldcorp Challenge for best gold prospecting methods or estimates

$50,000-250,000

$7,000,000 Millennium Math Prizes for seven unsolved problems

$250,000

Feynman Prizes for nano tech robot technology

$37,682,243 Super Efficient Refrigerator Program for highly efficient CFC free refrigerator

$1,210,084 Rockefeller Foundation Prize for Rapid STD Diagnostic Test

$ 10,917,192 European Information and Communication Technology Prize

$6,000,000 Lemelson-MIT Prize for invention of a patented product useful to society

$ 10,717,703 Ansari X Prize for private manned space flight

$1,600,000

$1,882,290 Schweighofer Prize for Europe’s forest industry competitiveness

$6,660,406 DARPA Grand Challenge for robotics in vehicles

$4,300,000 Methuselah Mouse Prize for demonstration of slowing of ageing process on mouse

$2,000,000 NASA Centennial Challenges for Improvements in space exploration

$1,210,084

Grainger Challenges for development of economical filtration devices for the removal of arsenic from well water in developing countries

Net present value of prizes paid (2006 US dollars, not to scale)

$ 10,000,000 Archon X Prize for sequencing the human genome

$ 25,000,000 Virgin Earth Challenge for removal of greenhouse gases

up to $1.5 billion Advance market Commitment for pneumococcal disease vaccine

$ 50,000,000 Bigelow Space Prize for crew transport into orbit

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


Achievement awards (e.g. Nobel Prizes, etc.)

Traditional prizes (e.g. X Prizes)

Proportional prizes(fixed sum divided in proportion to impact)

Success is ordinal (yes/no, or rank order)

AMC for medicines, COD for schooling(fixed price per unit)

Target is pre-specified

Target is to be discovered

Success is cardinal (increments can

be measured)

A typology of contest designs

Main role is as

commitment deviceMain role is

informational



Experiment #1

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


Offering proportional contests not only increased entry and total performance, but also reduces inequality

Winner-Take-All Contests Proportional Prize Contests

LostDid not enter Won Distribution

includes entrants and non-entrants

Results shown are for 207 contests involving 69 subjects


• 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 (𝑦 𝑖 ) depends on both effort and noise: 𝑦𝑖 (𝑒𝑖 |𝜀𝑖)=𝑒𝑖𝜀𝑖• noise ( ) 𝜀 is uniformly distributed on the interval [1− ,1+ ], [0,1]𝑎 𝑎 𝑎∈• success (𝑝 𝑖 ) is relative to other contestants: 𝑝 𝑖 (𝑒𝑖,𝑒j|𝜀𝑖,𝜀 j)=𝑦𝑖𝑟/(𝑦𝑖𝑟+𝑦 j

𝑟)

• payoff (𝜋 𝑖 ) depends on the value of prize (v) and cost of effort: (𝐸 𝜋 𝑖)=𝑝𝑖 − (𝑣 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/ ], we can𝑏• solve for pure strategy equilibria, and compare to laboratory behavior


Experiment #2

Treatment DET-L DET-H PROB-L PROB-H PP-L PP-H EffortEquilibrium 70.7 50.0 34.6 31.1 34.6 31.1Average 62.4 51.2 51.3 46.1 45.2 42.4Median 65.0 50.0 51.0 47.0 45.0 41.3St. Dev. 20.9 17.4 20.0 17.2 15.6 17.8

PayoffEquilibrium 0.0 25.0 38.0 40.3 38.0 40.3Average 6.7 20.8 19.7 25.8 27.1 28.9Median 0 0 0 0 27.6 28.4St. Dev. 47.1 49.0 49.7 49.5 16.5 27.2

Treatment DET-L DET-H PROB-L PROB-H PP-L PP-HValue of the Prize, 100 100 100 100 100 100Noise Parameter, 0.5 1 0.5 1 0.5 1Equilibrium Effort, 70.7 50.0 34.6 31.1 34.6 31.1Expected Payoff, 0.0 25.0 38.0 40.3 38.0 40.3

Table 1: Experimental Parameters and Equlibrium Predictions

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

Proportional contests elicit more realistic behavior, less optimism bias


• 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

How proportional prizes would workin African agriculture


Data needed to compute each year’s economic gain from technology adoption

Implementing Proportional Prizes: Data requirements

D S S’ S”Price

Quantity

J (output gain)

I(input change)

Q Q’

K(cost reduction)

Variables and data sources

Market dataP,Q National ag . stats.

Field dataJ Yield change × adoption rateI Input change per unit

Economic parametersK Supply elasticity (=1 to omit)Δ Q Demand elasticity (=0 to omit)

Δ Q

P


Data needed to impute each year’s adoption rate

Fraction of surveyed domain

Year

First survey

Other survey (if any)

Linear interpolations

First release

Projection (max. 3 yrs.)

Application date



DiscountedValue(US$)

First release

Calculation of NPV over past and future years

NPV at application date, given fixed discount rate

Projectionperiod(max. 3 yrs.?)

“Statute of limitations”

(max. 5 yrs.?)

Year



Hypothetical results of a West African contest

Example technology

Measured Social Gains(NPV in US$)

MeasuredSocial Gains (Pct. of total)

RewardPayment

(US$)

1. Cotton in Senegal 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

7. Fish processing in Senegal 231,810 0.6% 6,442

Total $35.99 m. 100% $1 m.

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.

Example results using case study data


Opportunity for a single-country trial in Ethiopia

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.

New technology adoption is stalled:


Number and proportion of farm holders applying new inputs, by education

Proportion of farms using new inputs:

No. of farms Fert. Impr. Seed Pesticide Irrigation

All farm holders 12,916,120 44% 12% 24% 8%

Of whom:

Illiterate 8,239,615 41% 10% 22% 8%

Informally educated 1,016,284 48% 13% 23% 12%

Some formal education 3,660,222 51% 16% 30% 8%

Source: Author's calculations, from CSA (2010), “Agricultural Sample Survey 2009-2010 (2002 E.C), Meher Season.” Version 1.0, 21 July 2010. Addis Ababa: Central Statistical Authority of Ethiopia. Available online at http://www.csa.gov.et/index.php?&id=59.

Adoption is especially slow for seeds:

Opportunity for a single-country trial in Ethiopia


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

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)– 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

– Innovations are location-specific; investors cannot observe success directly

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

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