The auction idea is interesting, but it seems more appropriate for people pursuing things that might actually pay off in the short term. For such things, the existing venture capital system probably works just fine.

Where government investment makes the most sense is for situations where venture capital doesn't work:

• Research on things that advance knowledge but are not in and of themselves profitable. E.g. proving the Riemann hypothesis.
• Research that is too risky for private investors (e.g. very long time to payoff or very speculative work). E.g. basic research on, say, stem cells.
• Research on things where it is hard for a private investor to recoup an initial investment. E.g. does a particular non-patentable compound have disease-fighting properties?

Geoff

PS Yes, Lazear and Rosen's work is spot on.