Fixed-Prize Tournaments Versus First-Price Auctions in Innovation Contests

Abstract

This paper analyzes a procurement setting with two identical firms and stochastic innovations. In contrast to the previous literature, I show that a procurer who cannot charge entry fees may prefer a fixed-prize tournament to a first-price auction. The reason is that, if the innovation technology is subject to large random factors, holding an auction may leave higher rents to firms.

Keywords: Innovation contests, auction, tournament, quality

JEL Classification: D44, H57, L15