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Inducing variety: a theory of innovation contests

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  • Igor Letina
  • Armin Schmutzler

Abstract

This paper 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

  • Igor Letina & Armin Schmutzler, 2015. "Inducing variety: a theory of innovation contests," ECON - Working Papers 200, Department of Economics - University of Zurich, revised Feb 2019.
    • Handle: RePEc:zur:econwp:200
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    File URL: https://www.zora.uzh.ch/id/eprint/111830/18/econwp200.pdf
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    References listed on IDEAS

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    1. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
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    4. Richard L. Fullerton & Bruce G. Linster & Michael McKee & Stephen Slate, 2002. "Using Auctions To Reward Tournament Winners: Theory and Experimental Investigations," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 62-84, Spring.
    5. Todd Kaplan, 2012. "Communication of preferences in contests for contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(2), pages 487-503, October.
    6. Juan‐José Ganuza & Esther Hauk, 2006. "Allocating Ideas: Horizontal Competition in Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 763-787, September.
    7. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    8. Kevin J. Boudreau & Nicola Lacetera & Karim R. Lakhani, 2011. "Incentives and Problem Uncertainty in Innovation Contests: An Empirical Analysis," Management Science, INFORMS, vol. 57(5), pages 843-863, May.
    9. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June.
    10. Wei Ding & Elmar G. Wolfstetter, 2011. "Prizes and lemons: procurement of innovation under imperfect commitment," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 664-680, December.
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    Cited by:

    1. Jean-Michel Benkert & Igor Letina, 2020. "Designing Dynamic Research Contests," American Economic Journal: Microeconomics, American Economic Association, vol. 12(4), pages 270-289, November.
    2. Bavly, Gilad & Heller, Yuval & Schreiber, Amnon, 2022. "Social welfare in search games with asymmetric information," Journal of Economic Theory, Elsevier, vol. 202(C).
    3. Koh, Youngwoo, 2017. "Incentive and sampling effects in procurement auctions with endogenous number of bidders," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 393-426.
    4. Igor Letina & Armin Schmutzler & Regina Seibel, 2024. "Killer Acquisitions And Beyond: Policy Effects On Innovation Strategies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 591-622, May.
    5. Brunner, Philipp & Letina, Igor & Schmutzler, Armin, 2024. "Research joint ventures: The role of financial constraints," European Economic Review, Elsevier, vol. 165(C).

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    More about this item

    Keywords

    Contests; tournaments; auctions; diversity; innovation; procurement;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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