Prizes and Lemons: Procurement of Innovation Under Imperfect Commitment

21 Pages Posted: 29 Aug 2011 Last revised: 29 Oct 2017

See all articles by Elmar Wolfstetter

Elmar Wolfstetter

Humboldt University of Berlin - Faculty of Economics; Korea University - College of Economics and Commerce; CESifo (Center for Economic Studies and Ifo Institute)

Wei Ding

University of Bonn - The Bonn Graduate School of Economics

Date Written: August 14, 2011

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 article analyzes the procurement of innovations when the procurer cannot commit himself 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 preventing bypass is more costly in the optimal auction, and the optimal fixed-prize tournament is more profitable than the optimal auction.

Keywords: innovation, contests, tournaments, auctions, bargaining, adverse selection

JEL Classification: C70, D44, D89, L12, O32

Suggested Citation

Wolfstetter, Elmar G. and Ding, Wei, Prizes and Lemons: Procurement of Innovation Under Imperfect Commitment (August 14, 2011). RAND Journal of Economics, 42, No. 4, Winter 2011 pp. 664–680, Available at SSRN: https://ssrn.com/abstract=1918412

Elmar G. Wolfstetter (Contact Author)

Humboldt University of Berlin - Faculty of Economics ( email )

Institut für Wirtschaftstheorie I
Spandauer Strasse 1
Berlin
Germany
+49 30 2093 5652/3 (Phone)
+49 30 2093 5619 (Fax)

HOME PAGE: http://www2.hu-berlin.de/wt1wo/staff/wolfstetter/index.html

Korea University - College of Economics and Commerce ( email )

Anam-dong, Sungbuk-Ku
Seoul, 136-701
Korea

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Wei Ding

University of Bonn - The Bonn Graduate School of Economics ( email )

Adenauerallee 24-26
Bonn, D-53113
Germany

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