Innovation is the ultimate driver of economic growth. It is also crucial for addressing global challenges, including pandemics and climate change. But the commercial incentives to innovate often fall far short of their social importance.
At the Market Shaping Accelerator (MSA), we seek to shape markets by better aligning commercial incentives with social value through the use of “pull” mechanisms (i.e., rewards for innovators delivering outputs and outcomes). Pull mechanisms incentivize innovation and scale up by credibly signalling demand and committing to reward success.
MSA designs pull mechanisms to fit the specific innovation problem. The appropriate mechanism depends on what funders can specify up front, whether they know which innovator is best placed to deliver, and when success can be measured. For example, an advance market commitment (AMC) commits to subsidize or purchase any future product that meets pre-specified requirements. AMCs are especially useful when the particular product needed is clear, but it is unclear which innovator is best placed to develop the solution. Other pull mechanisms, including procurement contracts, per-unit subsidies, lump-sum prizes, and milestone payments, are most useful in different contexts. MSA selects, tailors, and helps implement these tools for challenges such as rapid diagnostics for neonatal sepsis and low-cost chlorine sensors for water systems.
Where pull incentives are appropriate, funders then need to decide how large they should be (how much to pay for a successful innovation). Check out our interactive Pull Incentive Sizing Tool to estimate how much to offer to pay given using a few key inputs (including cost of R&D and probability of success).
To make the most of innovation funding, policymakers and philanthropists need to match the right tools with the right problems. Pull mechanisms are well suited for some problems, whereas “push” mechanisms (i.e., traditional upfront funding that pays for inputs, like grants) are more effective for others. The tables below summarizes types of push and pull mechanisms, explaining when each approach is more useful.
| Approach | Typically best suited when the goal is… | Examples |
|---|---|---|
| Research grants: Funds research costs, often upfront or through reimbursement. | …an innovation for which the funder can identify a well-placed innovator, including through a request for proposals, and that innovator is a specific university or nonprofit team. Research grants are sometimes used when an innovation lacks an immediate commercial application and/or when researchers have knowledge and intrinsic motivation to pursue promising avenues. | National Science Foundation (NSF): The NSF funds thousands of independent research projects each year in a wide range of fields including social sciences, sciences, and engineering; one grant supported research underlying Google’s PageRank. Howard Hughes Medical Institute (HHMI): Funds researchers for multi-year contracts that emphasize long-term scientific impact. |
| R&D contracts: Pays a specific company to develop a defined idea, proof of concept, or early-stage prototype within an agreed timeline and budget. | …an early-stage idea or prototype. A funder can identify an innovator well-placed to develop this, including through request for proposals, and this innovator is a specific company. | Radiation Injury Prevention: A $20m defense contract supports development of BIO 300, a potential pre-exposure drug for preventing radiation injury. Quieter Supersonic Flights: A $247.5m NASA contract funded development and testing of the X-59 to enable quieter supersonic flight over land. |
| Loan instruments: Reduce borrowing costs through direct loan provision, interest rate subsidies, flexible repayment terms, or loan guarantees. | …to support a socially valuable innovation that merits intervention, where firms have a credible, near-term path to revenue and lenders can help select capable firms. | DOE Office of Energy Dominance Financing (formerly known as the Loan Programs Office): Uses loan guarantees to incentivize the development of promising energy technologies and crowd in private capital; a prominent early loan helped Tesla scale. World Bank Group: Provides loans and loan guarantees for projects in low- and middle-income countries, often alongside private lenders, to support areas such as agriculture, energy, and infrastructure. |
| R&D tax credits: Allow companies to reduce their tax bill by claiming credits on eligible R&D expenses. | …to encourage broad private-sector investment in R&D. | R&E Tax Credit: A broad, incremental tax credit that incentivizes private-sector R&D across industries Wisconsin Energy Research Credits: Sector-specific R&D tax credits provide extra incentive for innovation in priority sectors such as energy |
| Approach | Typically best suited when the goal is… | Examples |
|---|---|---|
| Advance market commitment: A guarantee to subsidize or purchase a future product that meets pre-specified requirements from any eligible producer. AMCs can include price and quantity specifications to combine incentives for innovation with affordable access at scale. | …a product or service that people will use, but it is unclear which innovator is best placed to develop the solution. The innovation may also be difficult to copy (e.g., because there is tacit knowledge in the manufacturing process). | Gavi Pneumococcal Vaccine advance market commitment: $1.5b commitment helped lead to the development of three vaccines for strains relevant to low- and middle-income countries; the vaccines have saved an estimated 700,000 lives. |
| Procurement contracts: Contracts with a specific producer to purchase defined goods or services from a specific firm if they meet specified technical or functional requirements. | …a product or service that people will use, and funders are well placed to select a specific firm to contract with. | US Navy Nuclear Submarine Program: Cost-plus contracts shifted early development risk to the government, enabling suppliers to participate despite high technical and cost uncertainty. Volume guarantees which de-risk demand for specific firms can be a useful tool for expanding access to an existing innovation (e.g., contraceptive implants). |
| Per-unit subsidies & tax credits: Offers any eligible producer a predetermined payment for each unit produced or purchased. As adoption increases, companies learn to produce products more efficiently, lowering costs. | …to account for externalities and contribute to cost reduction over time. | Renewable Electricity Production Tax Credit: Per-unit of energy (kWh) subsidy for renewable electricity sources; US wind capacity rose from ~2 GW (2000) to >150 GW (2024). Carbon Capture Subsidies (Section 45Q): Tax credits per ton of CO2 associated with carbon capture, storage, and utilization. |
| Prizes: Offers lump-sum rewards to one or multiple innovators if their work meets technical targets or outperforms peers. Payment is made after success is verified. | …an early-stage idea or prototype, and we know the willingness to pay to solve it, but not the team most likely to contribute to its development. Once solved, it can easily diffuse to others (e.g., a formula). | Longitude Prize: An early example of market shaping, Britain’s Longitude Act of 1714, offered £20,000 (~£4m, adjusted for inflation) for a reliable method to determine longitude at sea. Defense Advanced Research Projects Agency (DARPA) Grand Challenges: $1m—$2m prizes for autonomous vehicle development, which helped surface technologies and staff that later contributed to Google’s self-driving car project (Waymo). |
| Milestone payments: Offers innovators pre-specified payments upon achieving defined milestones, rewarding incremental progress toward a target. | …an innovation that involves a clear sequence of technical achievements that can be specified in advance, and funding along the way can ease financing constraints. Funders could either contract with specific firms or structure the process as a competition. | NASA Commercial Orbital Transportation Services (COTS): Fixed-price, milestone-based contracts for private spaceflight; SpaceX and others cut development costs ~10x and operating costs 2–3x AgResults Brucellosis Vaccine Prize: Staged milestone payments, culminating in a $20 million prize; incentivizes developers to create a vaccine against Brucella melitensis in livestock |
A healthy innovation ecosystem often involves both push and pull. To help policymakers and philanthropists decide which funding mechanism is best suited to their given innovation problem, we worked with the Institute for Progress to build the Atlas of Innovation, an interactive tool.
The FAQs that follow address core questions about market shaping and MSA’s approach.
Several key market failures lead to underinvestment in innovation: