Citation

Discussion Paper Details

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Title: Prizes versus Contracts as Incentives for Innovation

Author(s): Yeon-Koo Che, Elisabetta Iossa and Patrick Rey

Publication Date: March 2017

Keyword(s): Contract rights, Inducement Prizes, innovation and Procurement and R&D

Programme Area(s): Industrial Organization and Public Economics

Abstract: Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea effciently. If research efforts are unverifiable and implementation costs are private information, a trade-ooff arises between the two objectives. The optimal mechanism resolves the tradeoff via two instruments: a monetary prize and a contract to implement the project. The optimal mechanism favors the innovator in contract allocation when the value of innovation is above a certain threshold, and handicaps the innovator in contract allocation when the value of innovation is below that threshold. A monetary prize is employed as an additional incentive but only when the value of innovation is suffciently high.

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Bibliographic Reference

Che, Y, Iossa, E and Rey, P. 2017. 'Prizes versus Contracts as Incentives for Innovation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11904