Inducing Variety: A Theory of Innovation Contests
University of Zurich, Department of Economics, Working Paper No. 200, Revised version
51 Pages Posted: 24 Jul 2015 Last revised: 21 Feb 2019
Date Written: February 2019
This paper 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.
Keywords: Contests, tournaments, auctions, diversity, innovation, procurement
JEL Classification: L14, L22, L23
Suggested Citation: Suggested Citation