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Incentivizing R&D: Prize or subsidies?

Author

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  • Fu, Qiang
  • Lu, Jingfeng
  • Lu, Yuanzhu

Abstract

This paper studies the optimal design of R&D contests. A “sponsor” (e.g. the US Department of Defense or the World Health Organization) wants to improve the quality of the winning products. To do so, it partitions its budget between two schemes: an inducement prize and efficiency-enhancing subsidies to the firms competing in the contest. Prizes and subsidies have different functions, and they provide complementary incentives. In the optimally designed contest, subsidies increase while the prize decreases, if the innovation process is more challenging. Further, sensible conditions are identified under which the optimal contest implements either a “handicapping” scheme (by preferentially subsidizing the “underdog”) or a “national champion” scheme (by favoring the “favorite”). Our analysis yields a number of useful implications and sheds light on an array of R&D incentive schemes, such as the DoD's design competitions and vaccine development incentives.

Suggested Citation

  • Fu, Qiang & Lu, Jingfeng & Lu, Yuanzhu, 2012. "Incentivizing R&D: Prize or subsidies?," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 67-79.
  • Handle: RePEc:eee:indorg:v:30:y:2012:i:1:p:67-79
    DOI: 10.1016/j.ijindorg.2011.05.005
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yu Chen & David Michael Rietzke, 2016. "Push or pull? Performance pay, incentives, and information," Working Papers 127987900, Lancaster University Management School, Economics Department.
    2. Giebe, Thomas, 2014. "Innovation contests with entry auction," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 165-176.
    3. Hans Gersbach & Marie-Catherine Riekhof, 2017. "Technology Treaties and Climate Change," CER-ETH Economics working paper series 17/268, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    4. Isabel Busom & Beatriz Corchuelo & Ester Martínez-Ros, 2014. "Tax incentives… or subsidies for business R&D?," Small Business Economics, Springer, vol. 43(3), pages 571-596, October.
    5. Martínez Ros, Ester & Busom, Isabel & Corchuelo, Beatriz, 2011. "Tax incentives and direct support for R&D : what do firms use and why?," INDEM - Working Paper Business Economic Series id-11-03, Instituto para el Desarrollo Empresarial (INDEM).
    6. Todd Kaplan & David Wettstein, 2015. "The optimal design of rewards in contests," Review of Economic Design, Springer;Society for Economic Design, vol. 19(4), pages 327-339, December.
    7. repec:eee:respol:v:46:y:2017:i:8:p:1465-1478 is not listed on IDEAS
    8. Julia Blasch & Nina Boogen & Nilkanth Kumar & Massimo Filippini, 2017. "The role of energy and investment literacy for residential electricity demand and end-use efficiency," CER-ETH Economics working paper series 17/269, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    9. Busom, Isabel & Corchuelo, Beatriz & Martinez Ros, Ester, 2012. "Tax incentives or subsidies for R&D?," MERIT Working Papers 056, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).

    More about this item

    Keywords

    R&D tournament; Contest design; Inducement prize; Research subsidies;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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