Three Essays on Auctions and Innovation

Innovation is central to development and economic growth. Innovation happens within some institutional framework. Auctions and auction-like mechanisms are institutions that organize transactions between economic agents. In the face of private information, they provide a means of revealing part of that information by inducing competition between agents. If well designed, they make use of the revealed information in order to achieve a certain objective, e.g., to maximize profit or to allocate efficiently. In three essays, this dissertation studies the use of auctions in the context of innovation. Chapter 1 looks at the widely used practice of allocating government R&D subsidies to private companies. We point out flaws of that practice and propose improvements that can be adopted separately or in combination. Our proposals are tested in controlled lab experiments and by simulation. The results suggest that adopting the proposals might substantially improve the allocation of subsidies. Chapter 2 revisits the literature on the sale, and, in particular, auctioning, of patent licenses by an innovator to a downstream oligopoly. It analyzes a modified auction that turns out to be more profitable than many other mechanisms that have been analyzed in the literature. There, a restricted number of royalty contracts is auctioned while all losers of the auction are granted the right to sign a royalty contract. Chapter 3 looks at R&D tournaments. It starts from two well-known auction institutions, the fixed-prize tournament and the scoring auction. It combines both with an entry auction, a feature that has been proposed in the literature. We characterize Bayesian Nash equilibria such that both mechanisms are equivalent in a number of ways.