Scarcity of Ideas and Optimal Prizes in Innovation Contests
75 Pages Posted: 11 Oct 2021
Date Written: August 16, 2021
This paper studies the relationship between optimal prizes and scarcity of ideas in innovation contests. We consider a model where both ideas and effort are integral parts of the innovation process. Contest participants are privately informed about their idea quality. We introduce a new stochastic order to rank scarcity of ideas and study how a contest designer's choice--maximizing prize--should vary with scarcity of ideas. We find that scarcity of ideas results in higher optimal prizes if and only if the benet from a marginal improvement in the new technology's performance is sufficiently low.
Keywords: innovation, idea distribution, contests, comparative statics, stochastic dominance
JEL Classification: D44, D82, O31
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