Using Auctions to Reward Tournament Winners: Theory and Experimental Investigations

This article explores theoretical and experimental implications of using auctions to reward winners of research tournaments. This process is a hybrid of the research tournament for a prize and a first-price auction held after the research is complete. The bids in the auction consist of a vector of both quality of the innovation and price. The experimental evidence supports the hypothesis that conducting auctions at the end of research tournaments will generally reduce the sponsor's prize expenditure relative to fixed-prize research tournaments. The potential importance of these results to the U.S. Department of Defense acquisition process is emphasized.