The Role of Participation in Innovation Contests
45 Pages Posted: 28 Feb 2017 Last revised: 21 Oct 2017
Date Written: October 1, 2017
We study a firm that employs an innovation contest to crowdsource innovation to a pool of solvers. The solvers have heterogeneous ability and face a non-negligible cost to enter the contest, which ultimately affects their decision to participate in the innovation contest. We distinguish between the set of participants who choose to enter and the set of solvers who could potentially enter. Conditional on a solver's participation decision, participants exert costly effort to submit a solution. Participants face uncertainty on the ability of the other participants, and on how many participants they will compete against. We characterize the relationship between the properties of the firm's innovation problem, the firm's incentive decision, and the subsequent participation and effort decisions of the solvers. We show that to maximize the performance of the best submitted solution, the seeker should employ a Winner-Takes-All incentive scheme. In contrast, to maximize the expected number of participants, the seeker should offer multiple rewards. That is, the design of an innovation contest means the firm faces a tension between the provision of multiple rewards to motivate participation and the utilization of a Winner-Take-All incentive to encourage the participants to exert high effort. This tension is absent if the firm can guarantee that all solvers will participate. Our research suggests that innovation contests with multiple rewards may simply exist because the firm derives value from contests with higher participation.
Keywords: open innovation, crowdsourcing, innovation contests with stochastic and endogenous participation, incentives for participation
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