Working paper

Prizes versus Contracts as Incentives for Innovation

Yeon-Koo Che, Elisabetta Iossa, and Patrick Rey


Procuring 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 otherwise. A monetary prize is employed as an additional incentive but only when the value of innovation is suficiently high.


Contract rights; Inducement Prizes; Innovation; Procurement and R&D;

JEL codes

  • D44: Auctions
  • D82: Asymmetric and Private Information • Mechanism Design
  • H57: Procurement
  • O31: Innovation and Invention: Processes and Incentives
  • O38: Government Policy
  • O39: Other

See also

Published in

TSE Working Paper, n. 16-695, September 2016