Optimal Award Scheme in Innovation Tournaments

Forthcoming, Operations Research

22 Pages Posted: 18 Mar 2016 Last revised: 2 Oct 2016

Laurence Ales

Carnegie Mellon University - David A. Tepper School of Business

Soo-Haeng Cho

Carnegie Mellon University - Tepper School of Business

Ersin Körpeoğlu

School of Management, University College London

Date Written: September 30, 2016

Abstract

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

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

Laurence Ales

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Soo-Haeng Cho (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

Pittsburgh, PA 15213-3890
United States

Ersin Körpeoğlu

School of Management, University College London ( email )

1 Canada Square Canary Wharf
London, E14 5AA
United Kingdom

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