Seminar by Ersin Körpeoglu Tepper School of Business Carnegie Mellon University
This paper studies an innovation tournament in which an organizer seeks solutions to an innovation-related problem from a number of independent agents. While agents exert efforts to improve their solutions, their outcomes are unknown a priori due to technical uncertainty and subjective taste of the organizer. We call an agent whose ex-post output contributes to the organizer’s utility a contributor, and consider a general case in which the organizer seeks any number of contributors. We show that a winner-takes-all award scheme is optimal to the tournament organizer for a large class (but not all) of distributions for agents’ uncertain outputs. In this case, when the spread of the output distribution or the number of contributors is sufficiently large, an open tournament that does not restrict entry of participants is optimal. Finally, we compare the organizer’s payoffs under different compensation rules that award participants based on their relative ranks, absolute performance or a combination of both.