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

See all articles by Igor Letina

Igor Letina

University of Bern - Department of Economics

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2019

Abstract

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

Letina, Igor and Schmutzler, Armin, Inducing Variety: A Theory of Innovation Contests (February 2019). University of Zurich, Department of Economics, Working Paper No. 200, Revised version, Available at SSRN: https://ssrn.com/abstract=2634532 or http://dx.doi.org/10.2139/ssrn.2634532

Igor Letina (Contact Author)

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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