Economics and Innovation

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Innovation is a key driver of economic growth and has spurred improvements in health, inequality, and social relations.
Contemporary innovations in biology and artificial intelligence have potential to:
- promote prosperity;
- improve health and education (including for the world’s most disadvantaged);
- address global challenges such as pandemics and climate change.
Concerns include environmental harm, increased inequality, and political polarization.
Economists can:
- design institutions to better align private incentives for the pace and direction of innovation with human and environmental needs;
- contribute directly to the innovation process by helping develop and rigorously test social innovations.

Market and incentive failures create large gaps between social needs and commercial incentives for innovation, illustrated by agricultural examples.
Patenting and geographic focus:
- "More than 5,000 innovations have been patented related to control of the European maize borer" but "only five for the maize stalk borer," which primarily affects production in sub-Saharan Africa.
Climate-related innovation gaps:
- Methane emissions from livestock make up "nearly 15 percent of all anthropogenic greenhouse gas emissions."
- Innovative feed additives could potentially reduce these emissions by "98 percent," but farmers lack strong incentives to purchase them, reducing innovators’ R&D incentives.
Public-good and information problems:
- Improved monsoon forecasts could produce benefits exceeding "$3 billion for farmers over five years in India alone," "perhaps 100 times as much as they would cost."
- Information services create spillover benefits because non-subscribing farmers can still access information from subscribers.
Monopsony and reuse problems:
- Innovations in government service delivery (e.g., digital agricultural extension) face a monopsony buyer problem since government is the most plausible buyer.
- Innovations with limited barriers to entry (e.g., climate-resilient crop varieties that farmers can replant) reduce innovators’ incentives to invest.

Economic analysis can guide the design of research funding systems and regulatory frameworks, including:
- allocation between basic research and translational work;
- safety regulations;
- centralized large-scale efforts versus open calls with peer review;
- ways to identify and nurture potential researchers from nontraditional backgrounds.
Alternatives to government "picking winners":
- Optimal patent design to balance incentives and monopoly-price distortions.
- Prizes and advance market commitments as alternative reward mechanisms.
- Example: Following a "$1.5 billion advance market commitment for the pneumococcal vaccine," three firms developed vaccines effective against strains common in developing economies; these vaccines have reached "hundreds of millions of children," saving an estimated "700,000 lives."
Government procurement as a lever for innovation:
- Cement is responsible for "about 7 percent of carbon dioxide emissions."
- Governments account for "half of US cement use" and could boost low-carbon cement innovation by factoring the social cost of carbon into procurement.

Economists can not only analyze institutions and incentives but also participate directly in developing innovations:
- Market design principles have been used to design kidney transplant matching systems.
- Development economists use experimental methods to both test and help develop innovations.
Evidence from Development Innovation Ventures (DIV):
- "36 percent of awards went to innovations developed by teams including development economists," scaled to reach "over 1 million users," compared with "just 6 percent of awards to innovations without such involvement."
- "63 percent of DIV-supported innovations that had previously been tested in randomized controlled trials reached more than 1 million people," compared with "only 12 percent of those without such trials."
- Example: Economists helped develop a credit-scoring approach using psychometrics to assess default risk for borrowers without credit histories, which scaled through commercial lender adoption.
Analogy: "Just as biochemists and computer scientists often develop practical innovations in their fields, economists are increasingly developing social innovations in ours."

Michael Kremer is the director of the Development Innovation Lab and a university professor in the Kenneth C. Griffin Department of Economics at the University of Chicago.
He is the "2019 co-recipient of the Nobel Memorial Prize in Economics Sciences."
"Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy."

F&D Magazine — "Economics and Innovation" by Michael Kremer, March 2024.

How Economics Must Change — Michael Kremer
- How Economics Must Change — Michael Kremer (Markdown version)
- How Economics Must Change — Michael Kremer (PDF)