Forthcoming, Operations Research
22 Pages Posted: 18 Mar 2016 Last revised: 2 Oct 2016
Date Written: September 30, 2016
In an innovation tournament, an organizer solicits innovative ideas from a number of independent agents. Agents exert effort to develop their solutions, but their outcomes are unknown due to technical uncertainty and/or subjective evaluation criteria. In order to incentivize agents to make their best effort, the organizer needs to devise a proper award scheme. While extant literature either assumes a winner-take-all scheme a priori or shows its optimality under specific distributions for uncertainty, this paper derives necessary and sufficient conditions under which the winner-take-all scheme is optimal. These conditions are violated when agents perceive it very likely that only few agents receive high evaluation or when a tournament does not require substantial increase in agents' marginal cost of effort to develop high-quality solutions. Yet, the winner-take-all scheme is optimal in many practical situations, especially when agents have symmetric beliefs about their evaluation. In this case, the organizer should offer a larger winner prize when he is interested in obtaining a higher number of good solutions, but interestingly the organizer need not necessarily raise the winner prize when anticipating more participants to a tournament.
Keywords: Contest, Contract, Incentive, Technology, Uncertainty
Suggested Citation: Suggested Citation
Ales, Laurence and Cho, Soo-Haeng and Körpeoğlu, Ersin, Optimal Award Scheme in Innovation Tournaments (September 30, 2016). Forthcoming, Operations Research. Available at SSRN: https://ssrn.com/abstract=2748895 or http://dx.doi.org/10.2139/ssrn.2748895