Prizes and Lemons: Procurement of Innovation under Imperfect Commitment

Wei Ding () and Elmar Wolfstetter ()
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Wei Ding: Bonn Graduate School of Economics

No 262, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: The literature on R&D contests implicitly assumes that contestants submit their innovation regardless of its value. This ignores a potential adverse selection problem. The present paper analyzes the procurement of innovations when the procurer cannot commit to never bargain with innovators who bypass the contest. We compare fixed-prize tournaments with and without entry fees, and optimal scoring auctions with and without minimum score requirement. Our main result is that the optimal fixed-prize tournament is more profitable than the optimal auction since preventing bypass is more costly in the optimal auction.

Keywords: innovation; contests; tournaments; auctions; bargaining; adverse selection (search for similar items in EconPapers)
JEL-codes: C70 D44 D89 L12 O32 (search for similar items in EconPapers)
Date: 2009-07

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