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on Contract Theory and Applications |
| By: | Che, Yeon-Koo; Iossa, Elisabetta; Rey, Patrick |
| Abstract: | Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea effciently. If research efforts are unverifiable and implementation costs are private information, a trade-ooff 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 in contract allocation when the value of innovation is below that threshold. A monetary prize is employed as an additional incentive but only when the value of innovation is suffciently high. |
| Keywords: | Contract rights; Inducement Prizes; innovation; Procurement and R&D. |
| JEL: | D44 D82 H57 O31 O38 O39 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11904&r=cta |
| By: | Daniel Danau (Université de Caen Normandie); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro”) |
| Abstract: | We model an agency relationship in which the agent's cost is non-monotonic with respect to type and the type is correlated with a public ex-post signal. The principal can use lotteries to exploit the type-signal correlation within the limit of the agent's liability. We establish conditions for first-best implementation, highlighting two effects on contractual design. First, the structure of the optimal lottery varies across types and, for each type, it depends on whether the cost is U shaped or reverse U shaped with respect to type. Second, as compared to the case of monotonic cost, the design of incentive compatible lotteries is easier when the cost is U shaped, more difficult when the cost is reverse U shaped. The root of the second effect is that incentives are non-monotonic either below or above some interior types. The two effects involve that non-monotonicity is unfavorable to the principal when the cost is reverse U shaped. This conclusion is at odds with the wisdom, concerning settings without correlated information, that non-monotonicity, which triggers countervailing incentives, enhances contracting. |
| Keywords: | non-monotonic cost; countervailing incentives; correlated information; limited liability; first-best implementation |
| JEL: | D82 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:bai:series:series_wp_02-2017&r=cta |