DP13664 Public Procurement as a Demand-side Policy: Project Competition and Innovation Incentives

Author(s): Alessandro De Chiara, Elisabetta Iossa
Publication Date: April 2019
Date Revised: February 2020
Keyword(s): Crowding out, innovation policy, Procurement, Research and Development, Steering effect
JEL(s): D8, H57, L2, O31, O38
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13664

We develop a model of project competition to compare two alternative and widely used approaches: (i) A (demand-side) procurement approach, in which the public authority specifies the type of project it will finance and (ii) a (supply-side) grant system, in which any type of project can be funded. The public authority can verify the characteristics of the projects submitted, but does not know which other projects are available. The paper sheds light on the role of public procurement to foster innovation.