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 Library of Munich, Germany in its series MPRA Paper with number 27397.
Date of creation: 05 Dec 2010
Date of revision:
contests; innovation; mechanism design.;
Other versions of this item:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- O32 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Management of Technological Innovation and R&D
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-INO-2011-01-03 (Innovation)
- NEP-IPR-2011-01-03 (Intellectual Property Rights)
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