The Optimal Design of Rewards in Contests
AbstractUsing 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.
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Bibliographic InfoPaper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2010/6.
Date of creation:
Date of revision: 22 Nov 2010
contests; innovation; mechanism design;
Other versions of this item:
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- O32 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Management of Technological Innovation and R&D
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