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Designing Innovation Contests for Diversity

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  • Letina, Igor
  • Schmutzler, Armin

Abstract

This paper analyzes the design of innovation contests when the quality of an innovation depends on the research approach of the supplier, but the best approach is unknown. Diversity of approaches is desirable because it generates an option value. In our main model with two suppliers, the buyer optimally uses a bonus tournament, where suppliers can choose between a low bid and a high bid. This allows the buyer to implement any level of diversity with the lowest revenue for the suppliers. We also compare other common contests, in particular, fixed-prize tournaments and auctions. Like bonus tournaments, auctions implement the socially optimal diversity, but usually with higher rents for the suppliers. Fixed-prize tournaments implement insufficient diversity, but may nevertheless be preferred by the buyer to auctions because of lower supplier rents.

Suggested Citation

  • Letina, Igor & Schmutzler, Armin, 2015. "Designing Innovation Contests for Diversity," CEPR Discussion Papers 10736, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10736
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    References listed on IDEAS

    as
    1. Todd Kaplan, 2012. "Communication of preferences in contests for contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(2), pages 487-503, October.
    2. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    3. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June.
    4. 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.
    5. Richard L. Fullerton & Bruce G. Linster & Michael McKee & Stephen Slate, 2002. "Using Auctions To Reward Tournament Winners: Theory and Experimental Investigations," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 62-84, Spring.
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    Cited by:

    1. Letina, Igor & Benkert, Jean-Michel, 2016. "Designing Dynamic Research Tournaments," Annual Conference 2016 (Augsburg): Demographic Change 145738, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    auctions; contests; diversity; procurement; tournaments;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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