Prizes versus Contracts as Incentives for Innovation

63 Pages Posted: 16 Mar 2017

See all articles by Yeon-Koo Che

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: March 2017

Abstract

Procuring 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-ooff 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, D82, H57, O31, O38, O39

Suggested Citation

Che, Yeon-Koo and Iossa, Elisabetta and Rey, Patrick, Prizes versus Contracts as Incentives for Innovation (March 2017). CEPR Discussion Paper No. DP11904. Available at SSRN: https://ssrn.com/abstract=2934216

Yeon-Koo Che (Contact Author)

Columbia University ( email )

420 W. 118th Street
New York, NY 10027

Elisabetta Iossa

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)

London
United Kingdom

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