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Incentivizing R&D: Prize or subsidies?

Author

Listed:
  • Fu, Qiang
  • Lu, Jingfeng
  • Lu, Yuanzhu
Abstract
This paper studies the optimal design of R&D contests. A “sponsor” (e.g. the US Department of Defense or the World Health Organization) wants to improve the quality of the winning products. To do so, it partitions its budget between two schemes: an inducement prize and efficiency-enhancing subsidies to the firms competing in the contest. Prizes and subsidies have different functions, and they provide complementary incentives. In the optimally designed contest, subsidies increase while the prize decreases, if the innovation process is more challenging. Further, sensible conditions are identified under which the optimal contest implements either a “handicapping” scheme (by preferentially subsidizing the “underdog”) or a “national champion” scheme (by favoring the “favorite”). Our analysis yields a number of useful implications and sheds light on an array of R&D incentive schemes, such as the DoD's design competitions and vaccine development incentives.

Suggested Citation

  • Fu, Qiang & Lu, Jingfeng & Lu, Yuanzhu, 2012. "Incentivizing R&D: Prize or subsidies?," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 67-79.
    • Handle: RePEc:eee:indorg:v:30:y:2012:i:1:p:67-79
    DOI: 10.1016/j.ijindorg.2011.05.005
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    References listed on IDEAS

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    More about this item

    Keywords

    R&D tournament; Contest design; Inducement prize; Research subsidies;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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