“but would academic institutes have enough resources to put the money up in advance? My understanding was that university scientists practically always need outside funding for empirical research projects.”

They need to get outside funding in substantial part because ordinarily such research is a cost to the university, so other constituencies eager for budget prevent such allocation. The situation is different for a profit center: universities invest billions in alternative investments, from hedge funds to timber lots. Investing in efficient research aimed at winning (abundant) prizes would be a high-return investment, as prize money (unlike grants) could be channeled to fund other activities.

I see your point about the biotechnology company, but would academic institutes have enough resources to put the money up in advance? My understanding was that university scientists practically always need outside funding for empirical research projects.

I also don’t think venture capitalists would be willing to put up lots of money for the simple reason that they cannot tell how big of a challenge the reasearchers would face.

The NIH spends $28 billion per year. The genomics X-prize is $10 million, and a winning team will have delivered a major medical advance. It seems highly improbable that having well under 1% of federal funding actually be performance-based prizes is optimal.

On the issue of not having funds to get research started, prizes don’t have to be enormous. Imagine the NIH allocating a fifth of its budget to endowing 5600 new $1 million prizes each year. The volume is sufficiently large that a medical school, biology department, or profit-making biotechnology company could compete for many prizes simultaneously, diversifying its research portfolio to earn a fairly steady stream of revenues, but with new incentives to conduct cost-*effective* research.