Quality incentive contract design in government procurement for innovation

Recently, as supply‐side innovation incentive policies do not work well in China, demand‐side instruments, like the government procurement for innovation, are emphasized. However, as the enterprise may be better informed than the government about its initial technology level and effort, the government faces the dual information asymmetry of adverse selection and moral hazard in the process of procurement. Thus, in this paper, series of quality incentive contract models are proposed to illustrate how the government can identify the initial technology type of the enterprise and motivate it to exert effort to improve the innovation quality.