Prizes Versus Contracts as Incentives for Innovation
55 Pages Posted: 22 Oct 2015 Last revised: 24 Oct 2015
Date Written: September 25, 2015
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: Suggested Citation