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Prizes and lemons: procurement of innovation under imperfect commitment


  • Wei Ding
  • Elmar G. Wolfstetter


The literature on R&D contests implicitly assumes that contestants submit their innovation regardless of its value. This ignores a potential adverse selection problem. The present paper analyzes the procurement of innovations when the procurer cannot commit to never bargain with innovators who bypass the contest. We compare ?xed-prize tournaments with and without entry fees, and optimal scoring auctions with and without minimum score requirement. Our main result is that the optimal ?xed-prize tournament is more pro?table than the optimal auction since preventing bypass is more costly in the optimal auction.
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Suggested Citation

  • Wei Ding & Elmar G. Wolfstetter, 2011. "Prizes and lemons: procurement of innovation under imperfect commitment," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 664-680, December.
  • Handle: RePEc:bla:randje:v:42:y:2011:i:4:p:664-680 DOI: j.1756-2171.2011.00149.x

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    References listed on IDEAS

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    Cited by:

    1. Giebe, Thomas, 2014. "Innovation contests with entry auction," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 165-176.
    2. Słomczyński, Wojciech & Życzkowski, Karol, 2012. "Mathematical aspects of degressive proportionality," Mathematical Social Sciences, Elsevier, vol. 63(2), pages 94-101.
    3. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 666-675.
    4. Igor Letina & Armin Schmutzler, 2015. "Inducing variety: a theory of innovation contests," ECON - Working Papers 200, Department of Economics - University of Zurich, revised Jun 2017.
    5. Kaplan, Todd R. & Zamir, Shmuel, 2015. "Advances in Auctions," Handbook of Game Theory with Economic Applications, Elsevier.
    6. Midjord, Rune, 2012. "Competitive Pressure and Job Interview Lying: A Game Theoretical Analysis," DFAEII Working Papers 2012-14, University of the Basque Country - Department of Foundations of Economic Analysis II.
    7. repec:kap:ejlwec:v:43:y:2017:i:3:d:10.1007_s10657-015-9520-1 is not listed on IDEAS

    More about this item

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D


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