Innovation contests with entry auction

Abstract

We consider procurement of an innovation from heterogeneous sellers. Innovations are random but depend on unobservable effort and private information. We compare two procurement mechanisms where potential sellers first bid in an auction for admission to an innovation contest. After the contest, an innovation is procured employing either a fixed prize or a first-price auction. We characterize Bayesian Nash equilibria such that both mechanisms are payoff-equivalent and induce the same efforts and innovations. In these equilibria, signaling in the entry auction does not occur since contestants play a simple strategy that does not depend on rivals' private information. JEL classifications: D21, D44, D82, H57, O31, O32.

Innovation Contests: A Review, Classification and Outlook

“…In an innovation contest targeting a broad population of independent agents, all participants incur costs as a result of their efforts, but only the winner gets the reward. Within these two types of contests, authors deal with many aspects such as: single or multiple prizes (e.g., Dixit, ; Glazer & Hassin, ; Cason, Master & Sheremeta, ; Giebe, ), single or multiple solvers (e.g., Baye, Kovenock & de Vries, ; Fullerton & McAfee, ), complete or incomplete information scenarios (e.g., Cohen, Kaplan & Aner, ) or contest designs (e.g., Taylor, ; Baye, Kovenock & de Vries, ).…”

Inducing Variety: A Theory of Innovation Contests

“…In models of fixed-prize tournaments, Taylor (1995) shows that free entry is undesirable, and Fullerton and McAfee (1999) show that the optimal number of participants is 2. Fullerton and McAfee (1999) and Giebe (2014) consider the use of entry auctions in order to select the most efficient contestants. Fullerton et al (2002) find that buyers are better off with auctions than with fixed-prize tournaments.…”

“…See Baye et al. () and Che and Gale () for all‐pay auctions, Lazear and Rosen (), Fullerton and McAfee (), Schöttner (), and Giebe () for tournaments; see also the general discussion in Konrad ().…”