Prizes versus Contracts as Incentives for Innovation

Yeon-Koo Che, Elisabetta Iossa and Patrick Rey

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Abstract: Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unveriable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the trade-off via two instruments: a cash prize and a follow-on contract. It primarily uses the latter, by favoring the innovator at the implementation stage when the value of the innovation is above a certain threshold and handicapping the innovator when the value of the innovation is below that threshold. A cash prize is employed as a supplementary incentive only when the value of innovation is sufficiently high. These features are consistent with current practices in the procurement of innovation and the management of unsolicited proposals.

Keywords: Contract rights; Innovation; Prizes; Procurement and R&D (search for similar items in EconPapers)
Date: 2021-01-23
New Economics Papers: this item is included in nep-ino, nep-mic, nep-ppm and nep-reg
Note: View the original document on HAL open archive server: https://hal.science/hal-03544026v1
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Published in Review of Economic Studies, 2021, 88 (5), pp.2149-2178. ⟨10.1093/restud/rdaa092⟩

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Related works:
Journal Article: Prizes versus Contracts as Incentives for Innovation (2021)
Working Paper: Prizes versus Contracts as Incentives for Innovation (2020)
Working Paper: Prizes versus Contracts as Incentives for Innovation (2017)
Working Paper: Prizes versus Contracts as Incentives for Innovation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03544026

DOI: 10.1093/restud/rdaa092

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