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Incentives and Problem Uncertainty in Innovation Contests: An Empirical Analysis

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Author Info

  • Kevin J. Boudreau

    ()
    (London Business School, London NW1 4SA, United Kingdom)

  • Nicola Lacetera

    ()
    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 2E9, Canada)

  • Karim R. Lakhani

    ()
    (Harvard Business School, Boston, Massachusetts 02163)

Abstract

Contests are a historically important and increasingly popular mechanism for encouraging innovation. A central concern in designing innovation contests is how many competitors to admit. Using a unique data set of 9,661 software contests, we provide evidence of two coexisting and opposing forces that operate when the number of competitors increases. Greater rivalry reduces the incentives of all competitors in a contest to exert effort and make investments. At the same time, adding competitors increases the likelihood that at least one competitor will find an extreme-value solution. We show that the effort-reducing effect of greater rivalry dominates for less uncertain problems, whereas the effect on the extreme value prevails for more uncertain problems. Adding competitors thus systematically increases overall contest performance for high-uncertainty problems. We also find that higher uncertainty reduces the negative effect of added competitors on incentives. Thus, uncertainty and the nature of the problem should be explicitly considered in the design of innovation tournaments. We explore the implications of our findings for the theory and practice of innovation contests. This paper was accepted by Christian Terwiesch, operations management.

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File URL: http://dx.doi.org/10.1287/mnsc.1110.1322
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 5 (May)
Pages: 843-863

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:5:p:843-863

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Keywords: innovation contests; uncertainty; innovation; problem solving; tournaments;

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Cited by:
  1. Hyndman, Kyle & Ozbay, Erkut Y. & Sujarittanonta, Pacharasut, 2012. "Rent seeking with regretful agents: Theory and experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 84(3), pages 866-878.
  2. Gambardella, Alfonso, 2013. "The economic value of patented inventions: Thoughts and some open questions," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 626-633.
  3. Pedro Bento, 2014. "Competition as a Discovery Procedure: Schumpeter Meets Hayek in a Model of Innovation," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(3), pages 124-52, July.
  4. Franzoni, Chiara & Sauermann, Henry, 2014. "Crowd science: The organization of scientific research in open collaborative projects," Research Policy, Elsevier, vol. 43(1), pages 1-20.
  5. Ethan Mollick & Ramana Nanda, 2014. "Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts," Harvard Business School Working Papers 14-116, Harvard Business School, revised Jun 2014.
  6. Clark, Derek J. & Nilssen, Tore & Sand, Jan Yngve, 2012. "Motivating over Time: Dynamic Win Effects in Sequential Contests," Memorandum 28/2012, Oslo University, Department of Economics.
  7. Felin, Teppo & Zenger, Todd R., 2014. "Closed or open innovation? Problem solving and the governance choice," Research Policy, Elsevier, vol. 43(5), pages 914-925.
  8. Daron Acemoglu & Mohamed Mostagir & Asuman Ozdaglar, 2014. "Managing Innovation in a Crowd," NBER Working Papers 19852, National Bureau of Economic Research, Inc.
  9. Murray, Fiona & Stern, Scott & Campbell, Georgina & MacCormack, Alan, 2012. "Grand Innovation Prizes: A theoretical, normative, and empirical evaluation," Research Policy, Elsevier, vol. 41(10), pages 1779-1792.

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