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Ding, Wei and Wolfstetter, Elmar G. (June 2009): Prizes and Lemons: Procurement of Innovation under Imperfect Commitment. SFB/TR 15 Discussion Paper No. 262
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Abstract

The literature on R&D contests implicitly assumes that contestants submit their innovation regardless of its value. This ignores a potential adverse selection problem. The present paper analyzes the procurement of innovations when the procurer cannot commit to never bargain with innovators who bypass the contest. We compare ?xed-prize tournaments with and without entry fees, and optimal scoring auctions with and without minimum score requirement. Our main result is that the optimal ?xed-prize tournament is more pro?table than the optimal auction since preventing bypass is more costly in the optimal auction.