Prizes Versus Contracts as Incentives for Innovation

55 Pages Posted: 22 Oct 2015 Last revised: 24 Oct 2015

Yeon-Koo Che

Columbia University

Elisabetta Iossa

University of Rome Tor Vergata; IEFE Bocconi University

Patrick Rey

Toulouse School of Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 25, 2015

Abstract

The procurement of an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unverifiable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the tradeoff via two instruments: a monetary prize and a contract to implement the project. The optimal mechanism favors the innovator in contract allocation when the value of innovation is above a certain threshold, and handicaps the innovator in contract allocation when the value of innovation is below that threshold. A monetary prize is employed as an additional incentive but only when the value of innovation is sufficiently high.

Keywords: Contract rights, Inducement Prizes, Innovation, Procurement and R&D

JEL Classification: D44, H57, D82, O31, O38, O39

Suggested Citation

Che , Yeon-Koo and Iossa, Elisabetta and Rey, Patrick, Prizes Versus Contracts as Incentives for Innovation (September 25, 2015). CEIS Working Paper No. 358. Available at SSRN: https://ssrn.com/abstract=2677626 or http://dx.doi.org/10.2139/ssrn.2677626

Yeon-Koo Che

Columbia University ( email )

420 W. 118th Street, 1016IAB
New York, NY 10027
United States
212-854-8276 (Phone)

HOME PAGE: http://www.columbia.edu/~yc2271

Elisabetta Iossa (Contact Author)

University of Rome Tor Vergata ( email )

Via Columbia n.2
Rome, 00133
Italy

IEFE Bocconi University ( email )

Via Roentgen 1
Milan, Milan 20136
Italy

Patrick Rey

Toulouse School of Economics ( email )

2 Rue du Doyen-Gabriel-Marty
Toulouse, 31042
France

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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