Incentives and Problem Uncertainty in Innovation Contests: An Empirical Analysis

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...

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Bibliographic Details
Published in:Management science 2011-05, Vol.57 (5), p.843-863
Main Authors: Boudreau, Kevin J., Lacetera, Nicola, Lakhani, Karim R.
Format: Article
Language:English
Subjects:
Applications
Applied sciences
Awards
Business innovation
Cash
Competition
Competitiveness
Computer programming
Computer software
Contests
Economic competition
Empirical research
Exact sciences and technology
Game theory
Incentives
Innovation
innovation contests
Innovations
Management science
Mathematics
Operational research and scientific management
Operational research. Management science
Operations management
Probability and statistics
Problem solving
Reliability, life testing, quality control
Rivalry
Sciences and techniques of general use
Software
Software industry
Statistics
Studies
Technological innovation
tournaments
Uncertainty
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Summary: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.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.1110.1322