The optimal design of rewards in contests
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.
|Date of creation:||05 Dec 2010|
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0109, Exeter University, Department of Economics.
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Econometric Society World Congress 2000 Contributed Papers
1784, Econometric Society.
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"Innovative Activity and Sunk Cost,"
2000-6, Tel Aviv.
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