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Prizes versus Contracts as Incentives for Innovation

Listed author(s):
  • Che, Yeon-Koo
  • Iossa, Elisabetta
  • Rey, Patrick

Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unverifiable and implementation costs are private information, a trade-off 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 otherwise. A monetary prize is employed as an additional incentive but only when the value of innovation is suficiently high.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 16-695.

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Date of creation: Sep 2016
Handle: RePEc:tse:wpaper:30793
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