Working Paper: CEPR ID: DP7758
Authors: Emeric Henry
Abstract: Prizes are often awarded to encourage research on products deemed of vital importance. We present a mechanism which can, in situations where the innovators are better informed about the difficulty of the research, tailor perfectly the expected reward to the expected research costs. The idea is to let the first successful inventor trade off the risk of having a competitor share the reward in exchange for a higher prize. If the goal of the designer is to minimize the prize awarded whilst encouraging innovators to conduct research, such a mechanism achieves the first best.
Keywords: Innovation; Race; Market Commitment; Mechanism; Mechanism Design; Prizes; Sorting
JEL Codes: D82; H57; O31; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| prize structure (D44) | expected research costs (O32) |
| prize structure (D44) | innovators' investment decisions (O31) |
| expected research costs (O32) | innovators' expected profits (O39) |
| difficulty of research (C90) | probability of simultaneous invention (O36) |
| sunk costs of research (D29) | innovators' investment decisions (O31) |
| research speed distribution (C46) | innovators' expected profits (O39) |
| prize structure (D44) | perfect compensation for innovators (O36) |
| mechanism designer's assessment of difficulty (D47) | prize minimization (D44) |