Parallel Search, Incentives and Problem Type: Revisiting the Competition and Innovation Link

Abstract:     
This paper presents econometric evidence of two independent effects of adding more competitors on innovation: 1) a competition effect whereby increasing rivalry shapes, and often decreases, incentives to expend effort and invest in innovation; and 2) a parallel search effect whereby adding greater numbers of searchers benefits innovation by broadening the search for solutions. We further show the importance of these effects depends on the nature of the innovation problem being solved. The analysis uses data from TopCoder's software contest platform, on which elite software developers were assigned different problems to solve within assigned groups of direct competitors. Econometric relationships are identified by exploiting random assignment and a separate instrumental variables procedure.

Keywords: competition, innovation, problem solving, search, complexity, distributed innovation, platforms

JEL Classifications: L1, L86, 03

Working Paper Series