Prizes versus Contracts as Incentives for Innovation

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-off arises between the two objectives. The optimal mechanism resolves the t...

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Bibliographic Details
Published in:The Review of economic studies 2021-10, Vol.88 (5), p.2149-2178
Main Authors: Che, Yeon-Koo, Iossa, Elisabetta, Rey, Patrick
Format: Article
Language:English
Subjects:
Economics and Finance
Humanities and Social Sciences
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Summary: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-off arises between the two objectives. The optimal mechanism resolves the trade-off via two instruments: a cash prize and a follow-on contract. It primarily uses the latter, by favouring the innovator at the implementation stage when the value of the innovation is above a certain threshold and handicapping the innovator when the value of the innovation is below that threshold. A cash prize is employed as a supplementary incentive only when the value of innovation is sufficiently high. These features are consistent with current practices in the procurement of innovation and the management of unsolicited proposals.
ISSN:0034-6527
1467-937X
DOI:10.1093/restud/rdaa092