1. Identifying and Rewarding Success with Proportional Prizes Will Masters Friedman School of Nutrition, Tufts University http://nutrition.tufts.edu http://sites.tufts.edu/willmasters NC-1034 meeting on The Future of Agricultural Research: Funding, Funding Mechanisms, and Public-Private Collaborations March 15, 2012

2. 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 Akerlofs 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 Prizes Motivation| Experimental Results | Application

3. 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 Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

4. 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) Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

5. (shown here: 1700-1930) Philanthropic prizes have a long history Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

6. (shown here: 1930-2009) Philanthropic prizes have grown quickly Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

7. 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 device Main role is informational Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

8. Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application Experiment #1

9. 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 Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

10. Offering proportional contests not only increased entry and total performance, but also reduces inequality Winner-Take-All Contests Proportional Prize Contests Lost Did not enter Won Distribution includes entrants and non-entrants Results shown are for 207 contests involving 69 subjects Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

11. 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 ( ) depends on both effort and noise: ( |)= noise ( ) is uniformly distributed on the interval [1,1+], [0,1] success ( ) is relative to other contestants: (, j |, j )=/(+ j ) payoff ( ) depends on the value of prize (v) and cost of effort: ()=() The three forms of competition are special cases of the success function Traditional WTA contest if r= Tullock WTA lottery if r=1 and p i 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 [()= 2 /], we can solve for pure strategy equilibria, and compare to laboratory behavior Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application Experiment #2

12. Treatment DET-LDET-HPROB-LPROB-HPP-LPP-H Effort Equilibrium 70.750.034.631.134.631.1 Average 62.451.251.346.145.242.4 Median 65.050.051.047.045.041.3 St. Dev. 20.917.420.017.215.617.8 Payoff Equilibrium 0.025.038.040.338.040.3 Average 6.720.819.725.827.128.9 Median 000027.628.4 St. Dev. 47.149.049.749.516.527.2 TreatmentDET-LDET-HPROB-LPROB-HPP-LPP-H 100 0.51 1 1 70.750.034.631.134.631.1 0.025.038.040.338.040.3 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 Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

13. 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 ones impact Investors, innovators and adopters use prize information to scale up spread of winning techniques How proportional prizes would work in African agriculture Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

14. Data needed to compute each years economic gain from technology adoption Implementing Proportional Prizes: Data requirements DSSS Price Quantity J (output gain) I (input change) QQ K (cost reduction) Variables and data sources Market data P,Q Nationalag. stats. Field data J Yieldchange×adoptionrate I Input change per unit Economic parameters K Supply elasticity(=1 to omit) Δ Q Demand elasticity (=0 to omit) ΔQ P Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

15. Data needed to impute each years adoption rate Fraction of surveyed domain Year First survey Other survey (if any) Linear interpolations First release Projection (max. 3 yrs.) Application date Implementing Proportional Prizes: Data requirements Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

16. Discounted Value (US$) First release Calculation of NPV over past and future years NPV at application date, given fixed discount rate Projection period (max. 3 yrs.?) Statute of limitations (max. 5 yrs.?) Year Implementing Proportional Prizes: Data requirements Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

17. Hypothetical results of a West African contest Example technology Measured Social Gains (NPV in US$) Measured Social Gains (Pct. of total) Reward Payment (US$) 1. Cotton in Senegal14,109,52839.2%392,087 2. Cotton in Chad6,676,42118.6%185,530 3. Rice in Sierra Leone6,564,25518.2%182,413 4. Rice in Guinea Bissau4,399,64412.2%122,261 5. Zai in Burkina Faso2,695,4897.5%74,904 6. Cowpea storage in Benin1,308,5583.6%36,363 7. Fish processing in Senegal231,8100.6%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 Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

18. 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: Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

19. Number and proportion of farm holders applying new inputs, by education Proportion of farms using new inputs: No. of farms Fert.Impr. SeedPesticideIrrigation All farm holders12,916,120 44%12%24%8% Of whom: Illiterate8,239,61541%10%22%8% Informally educated1,016,28448%13%23%12% Some formal education3,660,222 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 Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application

20. In conclusion… Identifying and Rewarding Success with Proportional Prizes Motivation| Experimental Results | Application 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 Akerlofs 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

22. 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

23. …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

24. 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

25. 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