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Delegating Investment in a Common-Value Project

  • Suzanne Scotchmer

    (Department of Economics, Goldman School of Public Policy, University of California, Berkeley)

I investigate the problem of delegating an investment effort when it is not known in advance which firm is most efficient, or whether the investment should be made at all. The motivating problem is that of commissioning R instead of relying on patent incentives. Firms have different private signals of a project's private (and social) value, and different costs of achieving it. I show that the two allocation problems of (i) making an efficient decision whether to invest, and (ii) delegating the investment to the least-cost firm can simultaneously be solved with no more profit dissipation than a procurement mechanism would require, assuming that the signals of value were known in advance.

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Paper provided by EconWPA in its series Industrial Organization with number 9912001.

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Length: 17 pages
Date of creation: 16 Feb 2000
Date of revision:
Handle: RePEc:wpa:wuwpio:9912001
Note: 17 pages Acrobat.pdf
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Gandal, Neil & Scotchmer, Suzanne, 1993. "Coordinating research through research joint ventures," Journal of Public Economics, Elsevier, vol. 51(2), pages 173-193, June.
  2. Deborah Minehart & Suzanne Scotchmer, 1995. "Ex Post Regret and the Decentralized Sharing of Information," Papers 0058, Boston University - Industry Studies Programme.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  4. Michael Kremer, 1997. "Patent Buy-Outs: A Mechanism for Encouraging Innovation," NBER Working Papers 6304, National Bureau of Economic Research, Inc.
  5. McAfee, R Preston & McMillan, John & Reny, Philip J, 1989. "Extracting the Surplus in the Common-Value Auction," Econometrica, Econometric Society, vol. 57(6), pages 1451-59, November.
  6. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  7. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-37, October.
  8. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
  9. Francesca Cornelli & Mark Schankerman, 1999. "Patent Renewals and R&D Incentives," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 197-213, Summer.
  10. Kremer, Michael R., 1998. "Patent Buyouts: A Mechanism for Encouraging Innovation," Scholarly Articles 3693705, Harvard University Department of Economics.
  11. Michael Kremer, 1998. "Patent Buyouts: A Mechanism For Encouraging Innovation," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1137-1167, November.
  12. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
  13. David Sappington, 1982. "Optimal Regulation of Research and Development under Imperfect Information," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 354-368, Autumn.
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