Innovation is a primary source of economic growth, and is accordingly the target of substantial academic and government attention. Grants are a key tool in the government’s arsenal of tools to promote innovation, but legal academic studies of that arsenal have given them short shrift. While patents, prizes, and regulator-enforced exclusivity are each the subject of a substantial literature, grants are typically addressed briefly, if at all. According to the conventional story, grants may be the only feasible tool to drive basic research, as opposed to applied research, but they are a blunt tool for that task.
Three critiques of grants underlie this narrative: grants are allocated by government bureaucrats who lack much of the relevant information for optimal decision-making; grants are purely ex ante funding mechanisms and therefore lack accountability; and grants misallocate risk by saddling the government all the downside risk and giving the innovator all the upside. These critiques are largely wrong. Focusing on grants awarded by the National Institutes of Health, the largest public funder of biomedical research, this Article delves deeply into how grants actually work. It shows that grants are awarded not by uninformed bureaucrats, but by panels of knowledgeable peer scientists with the benefit of extensive disclosures from applicants. It finds that grants provide accountability through repeated interactions over time. And it argues that the upside of grant-investments to the government is much greater than the lack of direct profits would suggest.
Grants also have two marked comparative strengths as innovation levers: they can support innovation where social value exceeds appropriable market value, and they can directly support innovation enablers — the people, institutions, processes, and infrastructure that shape and generate innovation. Where markets undervalue some socially important innovations, like cures for diseases of the poor, grants can help. Grants can also enable innovation by supporting its inputs: young or exceptional scientists, new institutions, research networks, and large datasets. Taken as a whole, grants do not form a monolithic, blunt innovation lever; instead, they provide a varied and nuanced set of policy options, and we should recognize and develop their usefulness in promoting major social goals.