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Prizes versus Contracts as Incentives for Innovation

Author

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  • Che, Yeon-Koo
  • Iossa, Elisabetta
  • Rey, Patrick

Abstract

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.

Suggested Citation

  • Che, Yeon-Koo & Iossa, Elisabetta & Rey, Patrick, 2017. "Prizes versus Contracts as Incentives for Innovation," CEPR Discussion Papers 11904, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11904
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Meng Wei Chen & Yu Chen & Zhen-Hua Wu & Ningru Zhao, 2018. "Government Intervention, Innovation, and Entrepreneurship," Graz Economics Papers 2018-15, University of Graz, Department of Economics.
    2. David Rietzke & Yu Chen, 2018. "Push or Pull? Performance-Pay, Incentives, and Information," Graz Economics Papers 2018-12, University of Graz, Department of Economics.

    More about this item

    Keywords

    Contract rights; Inducement Prizes; innovation; Procurement and R&D.;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O39 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Other

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