Winner-Take-All or Multiple Prizes? The Role of Idea Diversity in Innovation Contests

Abstract

Contests are widely used in the procurement of innovative products.  Our study of hundreds of real procurement contests reveals that the majority of them offer multiple prizes, particularly for building projects that require diverse and creative ideas. We also find that contests with multiple prizes tend to attract more players. We propose an incomplete-information contest model with the contest organizer valuing both the overall quality of proposals and the diversity of ideas. The model offers a new explanation for the coexistence of different prize structures: when the organizer's preference for diversity is sufficiently strong, offering multiple prizes is optimal, whereas a winner-take-all structure is optimal otherwise.

Keywords: innovation contests, multiple prizes, endogenous entry, diversity, procurement