The optimal design of rewards in contests

Todd R. Kaplan, David Wettstein

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

Using contests to generate innovation has been 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 (Formula presented.) where c is the cost of producing an innovation of level x and $$\beta $$β is the weight attached by the designer to the sum of efforts. 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.

Original languageEnglish
Pages (from-to)327-339
Number of pages13
JournalReview of Economic Design
Volume19
Issue number4
DOIs
StatePublished - 1 Dec 2015

Keywords

  • All-pay auctions
  • Contests
  • Innovation
  • Mechanism design

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (all)

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