Adler: Government-Sponsored Prizes would be Better than Subsidies

Michael Giberson

“Direct government subsidies are a particularly poor way to encourage innovation,” writes Jonathan Adler in an article asserting that government-sponsored prizes would be better than subsidies at encouraging the development of low-carbon-emission energy technologies.

Government subsidies tend to be dispersed on political criteria, rewarding large, politically connected incumbent firms, rather than innovative upstarts. Failing industrial dinosaurs with lobbyists on the payroll are in much better position to snatch up government goodies than revolutionary thinkers toiling in garages or private labs.

Offering substantial financial rewards for those who develop particular innovations or solve specific problems is a far better way to spur technological innovation and practical scientific research. As the patent system demonstrates, the hope of a large financial windfall is a powerful inducement for innovation, and can encourage many different people with different strategies or insights to tackle a given problem.

I’m sympathetic to the position advanced — government prizes are probably more consistent with individual liberty (of which I’m a fan) than government subsidies. But, as a technical complaint, this claim would be better assessed systematically rather than anecdotally. In particular, this claim troubles me:

Whereas direct government subsidies often yield a zero, if not negative, return, prizes tend to unleash research investment and returns far greater than the amount of the actual award.

I suspect the core audience for the article will snicker at the “zero, if not negative, return” claim, but we have had a hundred plus years of experience with government subsidies, so what is the yield? And how do we know that prizes are better?

One important structural difference is that subsidies usually pay for inputs, while prizes just pay for results. That is an attractive difference from the point of view of those folks paying the taxes to support research. But, from the narrow taxpayer point of view, paying for nothing is cheaper than paying for prizes. Advocate for prizes and you have to compare the costs and benefits of prizes over paying for nothing. But subsidies as an approach to funding research also have costs and benefits. The article raises the issue of the relative merits of prizes and subsidies, but doesn’t answer the question.

Of course, Adler set out to write an article, not a treatise. He highlights several interesting examples of prizes being used to successfully motivate scientific discovery. There are a number of related developments among philanthropists seeking cures for disease or advancements in knowledge. There is a growing sub-field of economics trying to discover how best to support research. Adler does a useful task by drawing attention to some of the cases.

(HT to Jonathan Adler at The Volokh Conspiracy.)