Download or read book Prizes Versus Contracts as Incentives for Innovation written by Yeon-Koo Che and published by . This book was released on 2015 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: The procurement of an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unverifiable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the tradeoff via two instruments: a monetary prize and a contract to implement the project. The optimal mechanism favors the innovator in contract allocation when the value of innovation is above a certain threshold, and handicaps the innovator in contract allocation when the value of innovation is below that threshold. A monetary prize is employed as an additional incentive but only when the value of innovation is sufficiently high.