Designing Innovation Contests for Diversity

Armin Schmutzler and Igor Letina

No 10736, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyzes the design of innovation contests when the quality of an innovation depends on the research approach of the supplier, but the best approach is unknown. Diversity of approaches is desirable because it generates an option value. In our main model with two suppliers, the buyer optimally uses a bonus tournament, where suppliers can choose between a low bid and a high bid. This allows the buyer to implement any level of diversity with the lowest revenue for the suppliers. We also compare other common contests, in particular, fixed-prize tournaments and auctions. Like bonus tournaments, auctions implement the socially optimal diversity, but usually with higher rents for the suppliers. Fixed-prize tournaments implement insufficient diversity, but may nevertheless be preferred by the buyer to auctions because of lower supplier rents.

Keywords: Auctions; Contests; Diversity; Procurement; Tournaments (search for similar items in EconPapers)
JEL-codes: L14 L22 L23 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-ino and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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