Prizes versus Contracts as Incentives for Innovation
Che Yeon-KooIossa ElisabettaRey Patrick
CEIS Research Paper
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 codes: D44, H57, D82, O31, O38, O39
Date: Thursday, October 22, 2015
Revision Date: Thursday, October 22, 2015