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INDUCING VARIETY: A THEORY OF INNOVATION CONTESTS
Author(s) -
Letina Igor,
Schmutzler Armin
Publication year - 2019
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12403
Subject(s) - contest , variety (cybernetics) , common value auction , tournament , value (mathematics) , microeconomics , economics , computer science , business , mathematics , artificial intelligence , machine learning , political science , combinatorics , law
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.