The Role of Participation in Innovation Contests
45 Pages Posted: 28 Feb 2017 Last revised: 12 Jul 2018
Date Written: October 1, 2017
Participation (i.e. committing resources) in an innovation contest can not be mandated or enforced, which calls for incorporating participation, in addition to effort incentives, as part of contest design. The result is a model of innovation contests with endogenous entry and participation uncertainty. Unlike contests with guaranteed entry, we show that a firm has to split its available budget into multiple rewards to attract optimal participation and effort from outside solvers. We demonstrate that, the expected highest output and the expected total output of the participants are both non-monotone in solver population when solver entry is endogenous, whereas they are non-monotone and strictly increasing in population respectively when all solvers participate with certainty. The expected highest output can be further improved if the firm announces an output reserve, i.e. a minimum acceptable output requirement for entry. We show that the optimal output reserve in innovation contests with endogenous entry is larger than the optimal output reserve in contests with guaranteed entry. Our results are robust under several modeling assumptions.
Keywords: new product development, innovation contests with stochastic and endogenous participation, incentives for participation
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