Monday, April 13, 2015
Linde Institute/Social and Information Sciences Laboratory (SISL) Seminar
Designing Dynamic Contests
Mohamed Mostagir, Stephen M. Ross School of Business, University of Michigan
Innovation contests have emerged as a viable alternative to the standard research and development process. They are particularly suited for settings that feature a high degree of uncertainty regarding the actual feasibility of the end goal. Participants race towards completing an innovation project and learn about the underlying environment from their own efforts as well as from their competitors' gradual progress. Learning about the status of competition can alleviate some of the uncertainty inherent in the contest, but it can also adversely affect effort provision from the laggards as they become discouraged about their likelihood of winning. Thus, the contest's information disclosure policy is critical for its success. This paper explores the problem of designing the award structure of a contest as well as its information disclosure policy in a dynamic framework, and provides a number of guidelines with the objective of maximizing the designer's expected payoff. In particular, we show that intermediate awards, apart from directly affecting the participants' incentives to exert costly effort, may also be used as a way for the designer to appropriately disseminate information about the status of competition. Interestingly, our proposed design matches many features observed in real-world innovation contests.