INDUCING VARIETY: A THEORY OF INNOVATION CONTESTS

Igor Letina and Armin Schmutzler

International Economic Review, 2019, vol. 60, issue 4, 1757-1780

Abstract: This article 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.

Date: 2019
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https://doi.org/10.1111/iere.12403

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Working Paper: Inducing variety: a theory of innovation contests (2019)
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