McCain's prize idea

Today John McCain unveiled a plan to spend $300 million in government money as a prize for a better battery. ($300 million = $1/American: get it?) This is part of a stampede of politicians seeking to appear to do something, whether or not it does any good (cf. Congressional investigation of energy “speculators”).

Batteries of course are for electric cars, which purported to solve two of the problems of the gasoline-powered cards: their carbon emissions, and increasingly scarce supplies of petroleum that are driving up energy costs.

IMHO this is a bad idea from a policy standpoint — not the prize, but the target. One problem is that batteries are hard and there has been billions of dollars of R&D spent over the past two decades already making batteries for cell phones and laptops; from what I’ve heard, it will be expensive to make something better than a lithium-ion battery, and the next technology will only be slightly better. Also, having the ability to run an electric car gets rid of the auto’s emissions, but it doesn’t generate the additional electricity needed to run it (which might come from coal or nuclear plants) nor deliver it across the transmission grid.

Instead, two things better to spend the money on would be cutting the production costs by 90% for either photovoltaic cells (creating more energy) or LED residential/commercial illumination (using less energies). Both are known technologies that everyone expects will achieve cost goals in the next 10-15 years, but additional funding could pull that forward by 5 years or so.

But leaving aside the goal, what about the use of a prize?

On the radio, one guy interviewed said “we should spend it with the national labs.” The radio show host suggested another Manhattan Project.

Frankly, I think throwing it at the government is about the worst thing you could do. (Other than perhaps have no-bid contracts as set-asides in a pork-laden spending bill). Frankly, while the national labs have some smart researchers, they have no where near the concentration of talent working on government research during World War II, the Manhattan Project at Los Alamos or the MIT Radiation Lab.

Instead, the government needs to do a little open innovation of its own (“Not all the smart people. in the world work for us”) and use the market to get the best answers. Today, the top scientific and engineering talent is scattered across academia, industry and government labs. You want a wide range of ideas — in terms of approaches and technologies.

It turns out that the prize idea is actually one that worked in the past — whether in conjunction with or instead of the right of exclusivity (i.e. a patent). In her book, economist Suzanne Scotchmer showed that there are cases where a prize is the optimal incentive mechanism for attracting innovation.

My co-author and friend Karim Lakhani (of Harvard Business School) has also done research on the value of prizes, and is quoted in an April Fast Company article about how prizes are effective at stimulating innovation.

One dirty little secret of prizes: the sponsor often benefits from the losers, even if the losers do not. For the X Prize for space flight, all of the finalists have an incentive to try to develop commercial businesses to earn a return on their aerospace R&D, so the donor gets not one commercial spaceflight company, but probably two or three. EBay’s $100K prize for the “best widget” has even more nake self-interest: it would get dozens (hundreds?) of widgets to make eBay more useful, but only has to pay for one.

However, prizes do have a win-win aspect: free publicity. Even if you finish #2 in the X Prize, you get a lot of publicity and (perhaps) legitimacy that you can use to launch your business. Try getting that with an SBIR award or a patent.