Public procurement, contract type, and innovation

What recent research might teach us about procurement policy

Editorial note: This week, I plan to write three articles about recent research from the National Bureau of Economic Research. This is the first.

Perhaps it’s cyclical, but the federal government appears to be a bit of a golden era of innovation around procurement methods. Whether it’s the rise of Other Transaction Authorities, clever use of the Small Business Innovation Research program, the advent of Commercial Solutions Openings, or just creative techniques such as advisory down-selects, we are seeing many new tools in the procurement official toolkit. (There’s even a Periodic Table of Acquisition Innovations!)

With these developments in the back of my mind, I read with great interest two recent Working Papers from the National Bureau of Economic Research. The first, Demand Shocks, Procurement Policies, and the Nature of Medical Innovation: Evidence from Wartime Prosthetic Device Patents, looked at wartime contract types to see what effect the procurement environment had on the development of medical innovations. Notably, the authors found that the government’s broad use of firm-fixed-price contract in the civil war led to “led inventors to focus broadly on reducing costs, while the less cost-conscious procurement contracts of World WarI did not.” Additionally, the authors found that “procurement environments can significantly shape the scientific problems with which inventors engage, including the choice to innovate on quality or cost.”

In the second paper, The Effects of Prize Structures on Innovative Performance, the authors ran a randomized control trial of a “prize competition” (similar to the federal, where the company used two compensation schemes: a winner-takes-all method and a multiple-winner method. The results were fascinating: “While overall innovation quality is similar between the two prize structures, submissions made under the one prize structure were significantly more novel relative to those made under the multiple prize structure.” Further, the authors found that “[p]roviding sizable rewards for only the very top performers appears to inspire the sort of risk-taking required to encourage the requisite creativity that delivers scientific and technological novelty. Moreover, since the additional risk under the winner-takes-all compensation scheme did not appear to reduce output levels, it appears that this more radical innovation can be obtained at relatively low cost.”

These two papers, when taken together offer an interesting window into a way of thinking about federal procurement policy and innovation. Although these new methods may be useful in procedural ways (such as reducing cycle times or increasing small-business utilization), it appears that they might also have utility in facilitating certain types of innovation. The authors are both careful to overgeneralize here (e.g., “it is important to recognize that incentives alone are insufficient to spark creativity”), but it may be the case that the emergent creativity in the federal acquisition policy might itself be a positive sign for private-sector innovation.