DP11904 Prizes versus Contracts as Incentives for Innovation
|Author(s):||Yeon-Koo Che, Elisabetta Iossa, Patrick Rey|
|Publication Date:||March 2017|
|Keyword(s):||Contract rights, Inducement Prizes, innovation, Procurement and R&D|
|JEL(s):||D44, D82, H57, O31, O38, O39|
|Programme Areas:||Public Economics, Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11904|
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.