Incentives and Problem Uncertainty in Innovation Contests: An Empirical Analysis

• Published in: Management science Vol. 57; no. 5; pp. 843 - 863
• Main Authors: Boudreau, Kevin J., Lacetera, Nicola, Lakhani, Karim R.
• Format: Journal Article
• Language: English
• Published: Hanover, MD INFORMS 01.05.2011; Institute for Operations Research and the Management Sciences
• Series: Management Science
• 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; High performance; innovation contests; Innovation; Uncertain system; tournaments; Extreme value; Competitiveness; Empirical method; Problem solving; uncertainty; Tournament; Investment
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.1110.1322

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.