Inducing Variety: A Theory of Innovation Contests

24 Pages Posted: 22 May 2020

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)

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Date Written: November 2019

Abstract

This article 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.

Suggested Citation

Letina, Igor and Schmutzler, Armin, Inducing Variety: A Theory of Innovation Contests (November 2019). International Economic Review, Vol. 60, Issue 4, pp. 1757-1780, 2019, Available at SSRN: https://ssrn.com/abstract=3602101 or http://dx.doi.org/10.1111/iere.12403

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 )

Z├╝rich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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