Prizes versus Contracts as Incentives for Innovation

Subgame Perfect Implementation Under Information Perturbations

Yeon-Koo Che, Elisabetta Iossa and Patrick Rey

The Review of Economic Studies, 2021, vol. 88, issue 5, 2149-2178

Abstract: 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 trade-off via two instruments: a cash prize and a follow-on contract. It primarily uses the latter, by favouring 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; R&D; D44; H57; D82; O31; O38; O39 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: 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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