The Dismal Science

How to Make America More Innovative

Give scientists more incentives to innovate.

Is America no longer the land of innovation? Everyone from tech billionaires to Times columnists is sounding the alarm, and everyone has his own diagnosis of the problem: innovators kept out of the country by H1-B visa quotas and bureaucracy. Poor science education in public schools. Even U.S.-style health care has been implicated. Would-be entrepreneurs, the thinking goes, can’t act on their breakthrough ideas because they feel tethered to middle-management jobs and the health benefits that come with them.

In one way or another, these diagnoses all focus on the inspired innovator as the source of new ideas. Perhaps this isn’t surprising, given the stories of innovation that seed our imagination—Newton discovering gravity when an apple bonked him on the head, Archimedes having his eureka moment while soaking in the tub. If the problem is indeed a shortage of innovators, then policy prescriptions that expand the genius pipeline through imports or home-grown development make a lot of sense. But as the saying goes, genius is 99 percent perspiration —Newton and Archimedes also logged countless days and nights producing the theories and inventions that followed from their moments of inspiration.

What made them work so hard? Passion and curiosity, no doubt. But that may not always be enough—a new study argues that it’s also important to get incentives right to induce would-be innovators to put in the hours of toil required to transform flashes of insight into breakthrough discoveries. By comparing the research output of scientists sponsored by funding streams with different incentives, the authors argue that a long time horizon combined with freedom to choose how to direct their efforts encourages researchers to take the kinds of risks that lead to more big ideas.

If economists ran research labs, how would they motivate scientists? Great ideas take time, effort, and perseverance. There are countless dead ends and failures along the way. If scientists need to produce short-term results to remain funded and employed, they’ll take on projects where there’s a good chance of success, often by looking to make incremental improvements on established results. So we end up with inventions like osteoporosis medication that’s taken monthly rather than daily, not a cure for cancer. (This isn’t to belittle the value of these lesser discoveries, but if game-changing inventions are what we’re hoping for, short-term thinking may not deliver.)

If we want scientists to take the risks required to make groundbreaking discoveries, we have to recognize that we’ll see a lot more failures as well—it’s part of exploring what does and doesn’t work—and give researchers some years before we judge whether they’ve been successful. (When an associate of Thomas Edison suggested that he might feel disappointment in having done so much work without any results to show for it, he famously replied, “Results! Why, man, I have gotten a lot of results. I know several thousand things that won’t work.”).

To assess the importance of incentives in stimulating innovation, MIT economists Pierre Azoulay and Gustavo Manso, together with UC-San Diego professor Joshua Graff Zivin, analyzed the research output of life scientists chosen as “Medical Investigators” during 1993-95 by the Howard Hughes Medical Institute, which provides long-term and flexible funding to award recipients. They measure HHMI investigators’ output against that of researchers who receive Pew, Searle, Beckman, Packard, and Rita Allen Scholarships—also prestigious early-career awards whose winners are probably of a caliber comparable to HHMI recipients. However, because these programs provide less funding than HHMI, award winners rely for the most part on National Institutes of Health support to pay for their research.

The HHMI and NIH funding incentives are a study in contrasts. HHMI gives five years’ worth of research funding, renewable at least once as long as reviewers see effort, not necessarily results. (After a decade, however, researchers do need to produce something for further renewal.) NIH funding typically expires after a few years. HHMI picks “people not projects” while the NIH does the opposite, tethering funding to particular experiments or analyses. Finally, the NIH also often demands preliminary results before funding a project, more or less ensuring success, but nevertheless encourages researchers to take baby steps in their work rather than leaps into the unknown.

If HHMI winners find more breakthroughs, it could be because there are better incentives for doing so. Then again, it’s also possible that the HHMI selection committee is just better at picking innovators than the committees at other award programs. To account for these possible differences, the authors use a statistical technique to match HHMI investigators to a group of other award winners that had virtually identical research publication track records prior to receiving their awards. By comparing two groups of researchers that looked so similar before receiving their awards, it’s more likely that which award they received was a matter of luck and random chance as opposed to a difference in the quality of the award-selection processes.

Despite comparable pre-award performance, the two groups diverge in the years that follow. HHMI winners are almost twice as likely to produce studies that are highly cited by other researchers. They are also more likely to produce research that introduces new words and phrases into their fields of research, as measured by the list of “keywords” they attach to their studies to describe their work. The downside is that they also produce more stinkers—studies that never get cited by anyone. But, again, that’s part of the exploration process. There’s also some tentative evidence that HHMI scholars experiment more than their NIH-funded counterparts: Their research is cited by scholars across a wider range of fields, and their keywords change more often across studies, both suggesting broader experimentation. (Another recent study, focusing on business R & D, suggests that long-term motivation is similarly important for scientists-turned-managers—corporate labs run by R & D heads with a lot of long-term incentive pay produce more highly cited patents than R & D managers with more short-term compensation.)

Incentives matter for innovation, and it’s a critical lesson for the government bureaucrats set to disburse hundreds of billions of dollars through Obama’s national Innovation Strategy, which is supposed to return America to innovative pre-eminence. The way we spend those dollars will be at least as important as how much we spend, and if we want the next generation of ideas to be Made in America, Obama’s team had better get its incentives right.