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Prizes and lemons: procurement of innovation under imperfect commitment
Author(s) -
Ding Wei,
Wolfstetter Elmar G.
Publication year - 2011
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2011.00149.x
Subject(s) - common value auction , commit , contest , procurement , adverse selection , microeconomics , tournament , value (mathematics) , economics , business , industrial organization , computer science , marketing , mathematics , database , combinatorics , machine learning , political science , law
The literature on research and development contests implicitly assumes that contestants submit their innovation regardless of its value. This ignores a potential adverse selection problem. The present article analyzes the procurement of innovations when the procurer cannot commit himself to never bargain with innovators who bypass the contest. We compare fixed‐prize tournaments with and without entry fees, and optimal scoring auctions with and without minimum score requirement. Our main result is that preventing bypass is more costly in the optimal auction, and the optimal fixed‐prize tournament is more profitable than the optimal auction.