Research On Innovation Incentive Mechanisms In Government Technology Procurement

Government technology procurement(public technology procurement) is one kind of purchasingbehavior of state organs, institutions and official social organizations at all levels by the use of fiscal funds,directly or indirectly on the innovative technologies or products. In contrast to regular governmentprocurement, in government technology procurement suppliers or contractors need to carry out R&Dactivities to meet the needs of government purchaser on quality or cost. According to whether thegovernment is the end-users of innovative technologies or products, government technology procurementcan be divided into direct technology procurement and indirect technology procurement. In directtechnology procurement the government has always been the end users of procured products, technologiesor systems, such as defense, telecommunications, railway sector, and utilizes their own demands to promotetechnological innovation of suppliers.In indirect technology procurement the government is an organizer ofthe procurement, to gather together and coordinate the needs of many dispersed buyers, to encourage theinnovative behavior of suppliers, to promote the proliferation of innovative products in the market toachieve a certain economic, social or environmental objectives. Innovation incentive mechanism in thegovernment technology procurement refers to a series of mechanisms designed by the principal, namely thegovernment, with which to drive contractors or suppliers to reveal their true information in the game andmotivate contractors or suppliers taking the system optimal R&D efforts.Government tehnology procurement has been emploied widely all over the world to motivateinnovation. Studies have shown that government technology procurement policies are more efficient thanthe widely used R&D subsidy policies to stimulate innovation. On one hand, government procurementmarket as a market first, the mechanisms that market demand constraints innovation still apply for. On theother hand, the government procurement market have some characteristics which the private market doesnot own, that make the government procurement market more powerful than the private market to promoteindependent innovation in some respects. One of the main problems for government in technologyprocurement is information asymmetry between the government purchasers and suppliers, which willundoubtedly leads to adverse selection and moral hazard. It is displayed mainly in two forms as below.(1)In order to get government procurement contracts, some suppliers often use the “information gaps” ofthe purchaser, to exaggerate their own technical strength and management advantages, try to conceal adverse information to obtain the contract, resulting in subsequent development process, quality indicatorsor progress of the project cannot reach the pre-requirements, or the cost overrun substantially.(2) In theproduction process, some suppliers use their information advantage to hide the ability to reduce costs anddo not seek to carry out technical innovation, or to disclose the development and production of informationas little as possible, or to provide the untrue cost information and list a lot of undue expenditure in the cost.It is because of the existence of adverse selection and moral hazard incurred by informationasymmetry in government procurement, so it is necessary to design some incentive mechanism to motivatethe supplier truthfully report their information and carry out optimal R&D effort. This dissertation uses theanalytical tools of game theory, combines with government procurement practices, and researches severalincentive mechanisms in different government technology procurement scenarios. The main content andconclusions are as follows.(1) Cost-sharing mechanism motivating innovation in government technology procurement. The thirdchapter examines linear incentive contract respectively with symmetric and asymmetric information, thatthe risk-neutral government purchasers and suppliers of risk aversion share cost overruns, and finds out thatunder conditions of asymmetric information cost-sharing coefficient is smaller than under symmetryconditions, the stronger R&D uncertainty the smaller the coefficient of cost-sharing, the less the sharingratio of the cost overruns by the government, and the greater the fixed payment to the supplier. Supplier’sR&D effort reduces with the increasing unceitainty of R&D cost and the effort is less with asymmetricinformation than with symmetric information.(2) Revenue-sharing mechanism motivating innovation in government technology procurement. Inrevenue-sharing mechanism, the purchaser does not have the true information on R&D cost type of thecontractor, so the purchaser and contractors negotiate on how to share the total social revenue of thetransaction. In negotiating process the purchaser offers the price, and the supplier can only choose to acceptor reject. After each round of negotiations, the purchaser can obtain new information, upon which to amendthe judgment on the type of supplier and motivate supplier’s optimal R&D effort. Bayesian equilibriumstrategies of the purchaser and supplier are investigated. The study shows that share ratios of purchasersand contractors from the transaction are determined ultimately by the discount rate, and the share ratio thepurchaser is willing to share is greater than the contractors want.(3) R&D contest mechanism motivating innovation in government technology procurement.Based onthe randomness of R&D quality, the chapter sets up a non-cooperative game model of R&D contest, and respectively explores the optimal strategy of contest sponsors and contestants under conditions ofincomplete information and incomplete information. The study shows that R&D investment level ofcontestants under conditions of incomplete information and incomplete information reduces as its ownR&D efficiency increases, and the higher the incompletion degree of the information of R&D contestants,the lower the equilibrium R&D investment. There exists an optimal reward to maximize the payoff of thecontest sponsor under each circumstance.(4) Order-allocating mechanism motivating innovation in government technology procurement. Thechapter studies how to design the order allocation mechanism in a supply chain consisting of twocompeting suppliers and government purchaser with incomplete information on the supplier’s R&Defficiency, for the purchaser to promote the competition between the suppliers and suppliers’ innovation toreduce production costs, and the market diffusion of the innovative products. Three order allocationmechanisms, namely first-price sealed auction, order halving auction, and second-price sealed auction arecompared, and conclusions are reached that equilibrium innovation efforts of the suppliers in the threeauction mechanism all increase with their own R&D efficiency; the greater the discrepancy of innovationefficiency of two suppliers, the higher the expected purchasing price of the government procurement;compared to orders halving auction and second-price sealed auction, first-price sealed auction is mostfavorable to market diffusion of the innovative products.(5) Price subsidy mechanism motivating innovation in government technology procurement. Based onthe conclusions above, this chapter takes into account the incentive effects of government price subsidies. Asupply chain model is constructed comprised of two competing suppliers, a government purchaser and theconsumers, in which the government purchases from the supplier through auction, the suppliers’ R&Dactivities can lower their costs. The impact on the supplier’s R&D efforts and social welfare of three kindsof subsidy forms, namely the lump sum subsidy to the supplier, unit subsidy to the supplier and unitsubsidy to the consumers are compared. The conclusions are reached that the lump sum subsidy tosuppliers can not motivate the supplier to increase the R&D efforts and also can not promote social welfare;unit subsidy to consumers and suppliers have the same effect on motivating the suppliers’ R&D efforts andimproving social surplus, and there exists an optimal unit subsidy amount maximizing social surplus.The innovation of this dissertation is mainly reflected in three aspects.(1)This dissertation breaks through the limitations that previous similar literatures only consider thecontractors’ moral hazard problem, reveals the relationship between the uncertainty of contractor’s R&D costs and government purchaser’s cost-sharing ratio in government technology procurement, and findsgovernment purchaser and the contractor’s optimal strategy under a linear cost-sharing incentive contract.This dissertation takes into account the reality of government procurement that informationasymmetry also lead to adverse selection problems besides moral hazard, and thus designs a linear contractthat risk-neutral government procurement and the risk-aversion suppliers share cost overruns, and focus onrelationship between the uncertainty of contractor’s R&D costs and government purchaser’s cost-sharingratio. This dissertation’s assumption on the correlation between contractor’s cost estimation and theefficiency of its R&D makes the conclusions of the paper is more reasonable.(2) The dissertation remedies the deficiencies of the previous literatures’ assumptions on the purchaserand supplier reservation value, proposes a revenue-sharing mechanism based on several rounds ofbargaining in the government technology procurement, finds out the determinants of revenue-sharing ratio,and explores the equilibrium bidding strategy for suppliers and government purchaser.In this paper, we consider the distribution of social revenue generated by the purchaser and thecontractor’s procurement transaction under the unilateral asymmetric information, and assumes that thepurchaser and supplier’s reservation values are correlative, which is determined by the quality of innovativeproducts, and thus more in line with the government procurement practice, and then find out the purchaserand supplier’s equilibrium strategies based on the Bayesian equilibrium model.(3) Different order-allocation mechanisms and price subsidy mechanism in the government’s indirectprocurement have been systemically compared and analyzed. Orders allocation mechanism and pricesubsidy mechanism that maximize social welfare are put forward. While previous studies mostly consideronly a certain kind of order allocation mechanism or price subsidy mechanism.Most of literatures that introduced auction mechanism to encourage suppliers’ innovation behaviorsmake assumptions that the size of procurement is fixed in advance and not subject to the influence of thesuppliers’ tender. This dissertation introduces the consumer market in the two-tier supply chain suppliersand government purchaser, so that the retailer’s purchasing quantity is determined by the supplier offer. Inaddition the dissertation overcomes the deficiency that considers only one mechanism, sets up game modelto explore the strategy of the supplier, and finds out the optimal mechanism.