The Optimal Design of Rewards in Contests

*Todd Kaplan
Economics, University of Haifa

David Wettstein
Economics, Ben-Gurion University

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     Last modified: December 11, 2010
     Presentation date: 03/12/2011 9:00 AM in NH 1120, Session A
     (View Schedule)

Abstract
Using contests to generate innovation has 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 c(x)/c′(x) where c is the cost of producing an innovation of level x. 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.