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This blog explores insights for multinational corporations, NGOs, academics, social entrepreneurs and others working at the Base of the Pyramid.

Wednesday, February 02, 2011

In Search of Innovation: Prize Incentives for International Development

By Josh Cleveland

Ansari X Prize winner SpaceShipOne lands in 2004

This article is the second post focused on prize mechanisms in international development. You can read the first, on the Haiti Mobile Money Initiative, here. You may access the full Dalberg report by clicking: Here

To incentivize the development of private spacecraft, promote the creation of algorithms to predict movie enjoyment, and generate behavior changes around health, prizes work quite well.

As some recent examples demonstrate, these mechanisms also can be effective catalysts for international development. Yet as Vicky Hausman, Associate Partner at Dalberg Global Development Advisors tells us, "announcing a cash reward and a set of rules is often not enough to achieve the desired result."

The prize mechanism for international development recently came into focus with Dalberg's report on the Gates Foundation/USAID Haiti Mobile Money Initiative. The insights from that competition for a $2.5 million top prize as well as observations from numerous other prize incentive attempts provides a growing body of information from which to assess what works and what doesn't.  

As it turns out, the team at Dalberg has been thinking about this puzzle for some time. To get to some deeper hypotheses on how prize mechanisms can be most effectively deployed, I turned to Dalberg's Vicky Hausman. In the rest of this article, we delve into how prizes work, when to use them, and some of the main challenges to getting this approach right. So without further ado...

NextBillion.net: To get our audience grounded, let's start with the basics. How do prize incentives generally work and what are some of their main characteristics? 

Vicky Hausman, Dalberg: Prizes have been used throughout history as a means to foster innovation and solve problems. The classic example dates back to 1714, when the British government offered a prize for discovery of a method for determining longitude. Today, prizes have become an increasingly common tool, with recent examples including the Ansari X-Prize ($10 million for a suborbital spacecraft), the Netflix Prize ($1 million for an algorithm predicting movie preferences), Ashoka's Changemakers competition (grants for new development programs), the Advanced Market Commitments (pre-orders for a pneumococcal vaccine), and the Gates Foundation/USAID Haiti Mobile Money Initiative (cash prizes for expanding the industry).

Generally, prize funds offer a financial award for realization of a specific achievement or innovation in a market.  Prizes typically (a) articulate a clear goal, (b) offer a compelling financial reward for success, and (c) have 'rules of the game' that determine what competitors must do to win, often within a fixed time period. The intention is that this financial award ("the prize") will encourage potential innovators to compete and solve the problem, thus accelerating the achievement or innovation. Though the number of competitors may depend on the problem to be solved, prizes can also provide a way of crowd-sourcing solutions, often via an online platform such as InnoCentive or Challenge.gov.

Depending on the intention and market dynamics, a prize may have one or multiple winners. It may also have a single payout or multiple payouts over time, corresponding to preset milestones. A number of innovative approaches to prizes are being explored.  For example, BioVentures for Global Health, a non-profit group based in San Francisco, is designing an incentive mechanism for medical research  with applications to support research and development of diagnostics, vaccines, and therapeutics. The mechanism would reward the achievement of milestones such as proof-of-concept, clinical validation, and regulatory approval. 

NextBillion.net: The Gates Foundation example you recently studied showed us that prize incentives have the ability to bring together many disparate entities to focus on a common problem. What are some of the other benefits of going with this approach?

Vicky Hausman, Dalberg: Prizes can have a number of benefits, particularly for donors and philanthropic investors in the development sector who are exploring ways to maximize the value of their investments. When used appropriately, prizes can provide an attractive alternative to grant funding or loans for a variety of reasons. First, innovators competing for a prize multiply the funders' investment by putting in their own time and resources.  Second - and this is important - the funders need only pay for success. Prizes also have the potential to accelerate the speed of a discovery or innovation, thanks to the competitive dynamic. Finally, prizes can be a catalyst for developing a market, fostering competition amongst private sector players in areas that may have been unattractive because of barriers to entry or market failures, as the Haiti Mobile Money Initiative demonstrates.  

NextBillion.net: From Dalberg's experience, what are the ideal circumstances under which a foundation or donor should consider using a prize mechanism? 

Vicky Hausman, Dalberg: Prizes are only effective and appropriate when several conditions are met.  There must be a clear and achievable problem to be solved; the rules and structure of the competition must be transparent and static; and there must be multiple, capable players who are interested in pursuing the prize and willing to invest time and resources in winning the prize rather than in other opportunities. When these conditions exist, prizes need to be managed effectively. Announcing a cash reward and a set of rules is often not enough to achieve the desired result.

The most successful prizes often dedicate staff time to activities such as encouraging potential competitors, addressing obstacles affecting all the competitors, generating publicity, verifying submissions, and answering questions. In the case of the Haiti Mobile Money Initiative, the Haiti-based team at HIFIVE (a branch of USAID) played an important role in prize administration that included these types of activities. Publicity, in particular, can play an important role in encouraging players to enter the competition.

NextBillion.net:  To help our readers understand more deeply what this looks like in practice, are there exemplary cases out there that you would point to as 'best practices'?   

Vicky Hausman, Dalberg: Examples of success include those mentioned above -the X-Prize, Ashoka Changemakers, the NetFlix prize, and now the Haiti Mobile Money Initiative. All of them adhere quite closely to the criteria outlined above.  Despite these examples, it's still early to evaluate the application and success of prizes intended to address some of global development's greatest challenges. Many proposals and ideas have been brought forward, such as creating a new tuberculosis diagnostic, fueling research and development for vaccines, and fostering innovation in African agriculture. But for the most part, these prize opportunities have not yet been funded, leaving a lot of room for further exploration of prizes as an effective tool.

NextBillion.net:  Assuming that foundations and donors keep the aforementioned advice in mind, what are some of the challenges that you've seen to getting it right with incentive funds or prizes?

Vicky Hausman, Dalberg: We've seen three main challenges. The first is in determining whether a prize fund is the appropriate tool given the market and desired innovation. If the required conditions don't exist, the likelihood of generating potential innovators' interest and ultimately solving the problem decreases.  Second, getting the prize structure right can be difficult: How big should a prize be to attract potential innovators without overpaying for innovation?  What should the rules of the competition be? How many prizes should be awarded, and when? Third, managing the prize once launched can be complicated, as there are often unexpected obstacles that require the intervention of the prize administrator. Dealing with these structural issues requires a deep understanding of the market, the innovators, and their incentives. And using a prize has opportunity costs; though prizes have a great deal of promise in many contexts, inappropriate use ties up funding that donors and foundations could spend more productively elsewhere. 

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