The Role of Participation in Innovation Contests
47 Pages Posted: 28 Feb 2017 Last revised: 7 Aug 2019
Date Written: May 1, 2019
When a firm uses an external contest to obtain solutions to their innovation challenges, a central concern for managers is how to manage the (potential) tension between insuring there are enough participants (the problems need a solution) and the desire for participants to exert effort to generate a high performance solution. Moreover, when the firm must fix the design of the contest, it cannot deduce exactly how many people will eventually choose to enter their contest, nor how capable these entrants will be. Critically, not everyone who could solve the firm's problem chooses to do so; in most cases, only a portion of the population of potential solvers actually enters the contest. Thus, the firm must balance the fact that too few (or no) submissions could result in the absence of a solution and the negative consequences of such an outcome. In contrast, too many participants could mean more low quality submissions and the highest quality participants could be discouraged from putting forth their best effort. We evaluate this setting and derive the optimal contest design to maximize the performance of the best submission while accounting for the possibility that an insufficient number of submissions is received. Our results provide an alternative rationale for why many contests may offer multiple awards: firms want to avoid the consequences associated with a contest that fails to yield a solution. Alternative levers of the firm are also studied: the establishment of performance thresholds and the decision to expand the potential population.
Keywords: new product development, innovation contests, partial participation, incentives for participation
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