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Optimal Award Scheme in Innovation Tournaments

Author

Listed:
  • Laurence Ales

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • 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)

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.

Suggested Citation

  • Laurence Ales & Soo-Haeng Cho & Ersin Körpeoğlu, 2017. "Optimal Award Scheme in Innovation Tournaments," Operations Research, INFORMS, vol. 65(3), pages 693-702, June.
    • Handle: RePEc:inm:oropre:v:65:y:2017:i:3:p:693-702
    DOI: 10.1287/opre.2016.1575
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    References listed on IDEAS

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