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Inducing variety: a theory of innovation contests

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  • Igor Letina
  • Armin Schmutzler

Abstract

This paper analyzes the design of innovation contests when the quality of an innovation depends on the research approach, but the best approach is unknown. Inducing a variety of research approaches generates an option value. We show that suitable contests can induce such variety. The buyer-optimal contest is a bonus tournament, where suppliers can choose only between a low bid and a high bid. This contest implements the socially optimal variety for a suitable parameter range. Finally, we compare the optimal contest to scoring auctions and fixed-prize tournaments.

Suggested Citation

  • Igor Letina & Armin Schmutzler, 2015. "Inducing variety: a theory of innovation contests," ECON - Working Papers 200, Department of Economics - University of Zurich, revised Feb 2019.
  • Handle: RePEc:zur:econwp:200
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    File URL: http://www.econ.uzh.ch/static/wp/econwp200.pdf
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    References listed on IDEAS

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    1. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    2. 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.
    3. Juan-José Ganuza & Esther Hauk, 2006. "Allocating Ideas: Horizontal Competition in Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 763-787, September.
    4. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    5. Konrad, Kai A., 2014. "Search duplication in research and design spaces — Exploring the role of local competition," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 222-228.
    6. Kevin J. Boudreau & Nicola Lacetera & Karim R. Lakhani, 2011. "Incentives and Problem Uncertainty in Innovation Contests: An Empirical Analysis," Management Science, INFORMS, vol. 57(5), pages 843-863, May.
    7. 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.
    8. Taylor, Curtis R, 1995. "Digging for Golden Carrots: An Analysis of Research Tournaments," American Economic Review, American Economic Association, vol. 85(4), pages 872-890, September.
    9. 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.
    10. 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. Jean-Michel Benkert & Igor Letina, 2016. "Designing dynamic research contests," ECON - Working Papers 235, Department of Economics - University of Zurich, revised Aug 2019.

    More about this item

    Keywords

    Contests; tournaments; auctions; diversity; innovation; procurement;

    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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