1. New incentives for new agricultural technology development in Africa William A. Masters Purdue University www.agecon.purdue.edu/staff/masters www.ifpri.org/publication/accelerating-innovation-prize-rewards African Economic Conference 13 Nov. 2009 Addis Ababa, Ethiopia

2. Motivation: Why might new incentives be needed? Why not just intellectual property rights (IPRs)? –succeeds only for excludable innovations that can be sold –gains from adoption may flow to consumers and other users Why not just grants & contracts? –succeeds only for known services that can be bought –procurement of R&D may face asymmetric information and other problems in project selection, supervision, and management Market-like “pull” mechanisms can help –allow donors to pay for results, after achievement occurs –the most familiar ex-post payment scheme is a prize contest

3. 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 to UC Berkeley for plant biology (‘99-03); Chocolate makers to STCP for cocoa in West Africa (2000-present) X Prizes for space flight etc. (1996-present), 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)

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

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

6. 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

7. …but traditional prize contests have serious limitations! Traditional prize contests are winner-take-all (or rank-order tournaments with consolation prizes) –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

8. 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

9. 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

10. Achievement awards (e.g. Nobel Prizes, etc.) Most technology 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) Proportional prizes complement other types of contest design Main role is as commitment device Main role is informational

11. 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 work to accelerate innovation

12. Data needed to compute each year’s economic gain from technology adoption Implementing Proportional Prizes: Data requirements DSS’S” 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

13. Data needed to estimate adoption rates across years 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

14. Discounted Value (US$) First release Computation of cumulative economic gains NPV at application date, given fixed discount rate Projection period (max. 3 yrs.?) “Statute of limitations” (max. 5 yrs.?) Implementing Proportional Prizes: Data requirements Year

15. Implementing Proportional Prizes: An example using case study data 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.

16. New payment incentives can be helpful –when funders can specify outcome but not method Proportional payments can be used… –when increments of achievement can be measured –to discover and reward all kinds of achievement Outcome of proportional prizes would be: –a portfolio of winners, each paid its share of gains –a visible guide to what works, where and when to attract additional investors and adopters In summary…

17. Refinement and endorsement of the initiative –3 journal articles, 21 presentations since 2003 –9-member Advisory Board formed October 2004 –FARA as potential Africa secretariat since Sept. 2005 Funding for concept development –Adelson Family Foundation, 2004-06 –International Food Policy Research Institute, 2006-08 Funding for prize rewards –could be single or multidonor, e.g. through CAADP Implementing proportional prizes: What’s done, what’s next

18. For more information… wmasters@purdue.edu www.agecon.purdue.edu/staff/masters www.ifpri.org/publication/accelerating-innovation-prize-rewards