Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/126594
Authors: 
Letina, Igor
Schmutzler, Armin
Year of Publication: 
2015
Series/Report no.: 
Working Paper Series, University of Zurich, Department of Economics 200 [rev.]
Abstract: 
This paper analyzes the design of innovation contests when the quality of an innovation depends on the research approach of the supplier, but the best approach is unknown. Diversity of approaches is desirable because it generates an option value. In our main model with two suppliers, the buyer optimally uses a bonus tournament, where suppliers can choose between a low bid and a high bid. This allows the buyer to implement any level of diversity with the lowest revenue for the suppliers. We also compare other common contests, in particular, fixed-prize tournaments and auctions. Like bonus tournaments, auctions implement the socially optimal diversity, but usually with higher rents for the suppliers. Fixed-prize tournaments implement insufficient diversity, but may nevertheless be preferred by the buyer to auctions because of lower supplier rents.
Subjects: 
contests
tournaments
auctions
diversity
procurement
JEL: 
L14
L22
L23
Document Type: 
Working Paper

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