The optimal design of rewards in contests

Kaplan, Todd R and Wettstein, David (2010): The optimal design of rewards in contests.

Abstract

Using contests to generate innovation has and is widely used. Such contests often involve offering a prize that depends upon the accomplishment (effort). Using an all-pay auction as a model of a contest, we determine the optimal reward for inducing innovation. In a symmetric environment, we find that the reward should be set to c(x)/c′(x) where c is the cost of producing an innovation of level x. In an asymmetric environment with two firms, we find that it is optimal to set different rewards for each firm. There are cases where this can be replicated by a single reward that depends upon accomplishments of both contestants.

• Item Type: MPRA Paper
• Language: English
• Keywords: contests, innovation, mechanism design.
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C70 - General; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly ; Monopolization Strategies

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