Using Prize Rewards to Stimulate Innovation and

Adoption in African AgricultureWilliam A. Masters

Professor of Agricultural EconomicsPurdue University

wmasters@purdue.edu

www.agecon.purdue.edu/staff/masterswww.agecon.purdue.edu/prizes

www.fara-africa.org

Prize rewards: the story ahead

•African agriculture needs new innovation incentives •We propose a new system of “prize rewards”:

– a fixed sum, paid proportionally to measured value, – to reward innovators for value they create but cannot capture– to recognize successful approaches and attract other funding

•These slides detail our motivation and proposal– published in 3 refereed journal articles– discussed at >17 conferences and workshops– funded so far by Adelson Family Foundation and IFPRI– supported by 8-member advisory board– endorsed by NEPAD, for implementation through FARA

Average cereal yields by region, 1961-2004

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Ave

rage

cer

eal

yiel

ds (m

t/ha)

RestWorldE&SEAsiaSouthAsiaSSAfrica

The problem: Africa’s ag technology is far behind

Source: calculated from FAO data, at http://faostat.fao.org.

There are diminishing returns to inputs, e.g. simply adding more fertilizer

Fertilizer Use (N+P+K), 1961-2002

1

10

100

1000

kg p

er h

a of

ara

ble

land

. RestWorldE&SEAsiaSouthAsiaSSAfrica

Source: calculated from FAO data, at http://faostat.fao.org.

Sustaining growth requires new technologies, e.g. new varieties

Adoption of new varieties (pct. of cropped area)

13%

42%

62%

80%

8%

23%

39%52%

12%4%1%

26%

0%10%20%30%40%50%60%70%80%90%

1970 1980 1990 1998

AsiaLat.Am.SSAfrica

Source: Calculated from data in R.E. Evenson and D. Gollin (2003), Crop Variety Improvement and its Effect on Productivity. Wallingford: CABI.

Africa has had remarkably low public investment in crop improvement

Public agricultural R&D per capita, 1971-2000

02468

101214161820

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Exp

endi

ture

per

cap

ita (1

993U

S$)

.

OECDSub-Saharan Africa

Note: Sample varies from n=13 to 26 for SSA countries, and n=9 to 15 for OECD countries.Source: Agricultural R&D is from IFPRI (2003), available online at www.asti.cgiar.org; total population is from FAOStat (2004), available online at apps.fao.org.

Private R&D builds onpublic investment

Notes: Calculated from IFPRI (2003), available online at www.asti.cgiar.org. Data refer to various years from 1971 through 2000, and exclude the chemical and machinery sectors.

01

23

45

6P

rivat

e R

&D

per

Cap

ita (1

993

US

$)

0 5 10 15 20 25 30 35Public R&D per Capita (1993 US$)

Netherlands

UK

US

Sweden

NZ

France

R&D has varied but high payoffsin all regions, including Africa

Source: Alston, J.M., M.C. Marra, P.G. Pardey, and TJ Wyatt. 2000. "Research returns redux: A meta-analysis of the returns to agricultural R&D." Australian J. of Ag. and Resource Econ., 44(2): 185-215.

Estimated return to agricultural research and extension (%/year)

Almost all assessments show returns above 10% cost of capital

A few studies document blockbuster discoveries

…but sustaining foreign aid for agricultural R&D has been difficult!

USAID Funding for Research and Extension in Africa, FY1961-2001

0

20

40

60

80

100

Curr

ent U

S Do

llars

(Mill

ions

) .

Total

Research

Extension

Source: Gary Alex (2003), unpublished file data.

•Agricultural innovation faces a severe market failure–value creation is measurable but dispersed among the poor–private investment is limited by cost of value capture–public investment is limited difficulty of predicting success

• Innovation can be accelerated with prize payments– to reward successful innovators– to recognize successful strategies:

• attract private investment for marketable innovations• attract public funding to proven approaches

Prize rewards canjump-start innovation

• Prize programs are often needed– Rewards for personal accomplishment are widespread– Rewards for specific technologies arise as needed:

• 1714-1773 British reward for computing longitude at sea• 1802-1809 French reward for food preservation• 1901-1940 Various rewards for civil aviation• 1995-2005 Ansari X-prize for civilian spaceflight

• Technology prizes are a temporary instrument– by revealing what works best, they are replaced by

• private investment when the innovation is marketable• public grants and contracts when it is a public service

Prize initiatives are important but short-lived

• Pre-specifying a traditional prize won’t work– farmers need a changing portfolio of new techniques– success requires location-specific knowledge

• but we can measure value with verifiable data– controlled experiments for output/input change– farm surveys for extent of adoption;– input and output prices

• so donors can reward social value like a market sale– announce funding, eligibility and measurement rules– assist innovators to compile data after adoption– verify data and pay out in proportion to measured gains– visibility of rewards leads others to imitate success

How prize rewards can helpjump-start African agriculture

New technologies often involve multiple innovationsGenetic

improvement

(by researchers, using controlled trials)

Agronomic improvement

(by farmers, using land & labor)

Successful innovationsare often surprising

traditional “flat” planting

labor-intensive“Zai” microcatchments

For these fields, the workers are:

Prize rewards can stimulateany kind of innovation

whose value is measurable

improved fish-drying in Senegal

using hermetic bags to store crops

Implementing Prizes: Schematic overview

Step 1:donors specify

lines of credit for target domains

(e.g. $1 m. for food crops)

Step 3:secretariat verifies data and computes

reward payments(e.g. 1/36th of measured gains)

Step 2:innovators submit

data on gains from new techniques after adoption

(e.g. $36 m. over 7 submissions)

Impact:other donors, investors

and innovatorsimitate successes

Prizes would be a small fraction of total activity,

but a key market-like signal of value

Implementing Prizes: An example using case study data

Example technology

Measured Social Gains

(NPV in US$)

MeasuredSocial Gains (Pct. of total)

RewardPayment

(US$)

1. Cotton in Senegal 14,109,528 39.2% 392,0872. Cotton in Chad 6,676,421 18.6% 185,5303. Rice in Sierra Leone 6,564,255 18.2% 182,4134. Rice in Guinea Bissau 4,399,644 12.2% 122,2615. “Zai” in Burkina Faso 2,695,489 7.5% 74,9046. Cowpea storage in Benin 1,308,558 3.6% 36,3637. Fish processing in Senegal 231,810 0.6% 6,442Total $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.

Data needed to compute each year’s economic gain from technology adoption

Implementing Prizes: Data requirements

D S S’ S”Price

Quantity

J (output gain)

I(input change)

Q Q’

K(cost reduction)

Variables and data sources

Market dataP,Q National ag. stats.

Field dataJ Yield change×adoption rateI Input change per unit

Economic parametersK Supply elasticity (=1 to omit)ΔQ Demand elasticity (=0 to omit)

ΔQ

P

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 Prizes: Data requirements

DiscountedValue(US$)

First release

Computation of cumulative economic gains

NPV at application date, given fixed discount rate

Projectionperiod(max. 3 yrs.?)

“Statute of limitations”

(max. 5 yrs.?)

Implementing Prizes: Data requirements

Year

• Refinement and endorsement of the proposal – many meetings, publications and citations since 2003– formal Advisory Board formed October 2004– formal FARA commitment September 2005

• Funding for project development– Adelson Family Foundation (New York), 2004-06– IFPRI (Addis Ababa), 2006-08

• Funding for prize rewards– significant interest from various donors– could be funded directly through FARA

Implementing prizes:What’s done, what’s next

For more information…

wmasters@purdue.edu

www.agecon.purdue.edu/staff/masterswww.agecon.purdue.edu/prizes

www.fara-africa.org

Walter Alhassan (Ghana, former DG of CSIR)Julian Alston (UC Davis)Jock Anderson (World Bank)Alain de Janvry (UC Berkeley)Bruce Gardner (U of Maryland)Anil K. Gupta (Natl. Innovation Found., India)Michael Kremer (Harvard)Jenny Lanjouw (Berkeley)Richard Mkandawire (NEPAD)Oumar Niangado (Syngenta Fndtion)George Norton (Virginia Tech)Rob Paarlberg (Wellesley)Prabhu Pingali (FAO)Per Pinstrup-Andersen (Cornell)Jim Ryan (Australia, former DG of ICRISAT)Eugene Terry (former DG of WARDA)

Other endorsements to date

Simeon Ehui (World Bank)Robert Evenson (Yale)Richard Nelson (Columbia)Phil Pardey (Minnesota)Carl Pray (Rutgers)Jeffrey Sachs (Columbia)Pedro Sanchez (Columbia)Brian Wright (Berkeley)David Zilberman (Berkeley)

Advisory Board