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Fixed-prize tournaments versus first-price auctions in innovation contests

Abstract

This paper analyzes a procurement setting with identical firms and stochastic innovations. In contrast to the previous literature, I show that a procurer who cannot charge entry fees may prefer a fixed-prize tournament to a first-price auction. The reason is that holding an auction may leave higher rents to firms when the innovation technology is subject to large random factors.

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Correspondence to Anja Schöttner.

Additional information

I would like to thank Dominique Demougin and Carsten Helm for helpful comments and discussions. Financial support by the Deutsche Forschungsgemeinschaft through the SFB 649 “Economic Risk” is gratefully acknowledged.

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Schöttner, A. Fixed-prize tournaments versus first-price auctions in innovation contests. Economic Theory 35, 57–71 (2008). https://doi.org/10.1007/s00199-007-0208-9

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Keywords

  • Innovation contest
  • Auction
  • Tournament
  • Quality

JEL Classification Numbers

  • D44
  • H57
  • L15