Optimal Award Scheme in Innovation Tournaments

Laurence Ales, Soo-Haeng Cho () and Ersin Körpeoğlu ()
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Soo-Haeng Cho: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
Ersin Körpeoğlu: School of Management, University College London, London E14 5AB, United Kingdom

Operations Research, 2017, vol. 65, issue 3, 693-702

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. 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: games/group decisions; tournament; research and development; innovation (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (28)

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