Performance enhancement in two-stage innovation contests: Feedback and elimination schemes

Abstract

Innovation is one of the driving forces of economic development and social progress, and the crowdsourcing contest is a well-established mechanism for encouraging innovation. This paper examines two incentive schemes in two-stage innovation contests: feedback and elimination. Feedback enhances the efforts by revealing the competitive status, and elimination intensifies the competition by removing less-qualified participants. We build a game theoretical model to investigate how the organizer should design the feedback and elimination schemes and then analyze the equilibrium efforts and optimal contest design in four-solver contests. The results suggest that the optimal design depends on the combined effects of the reward, effort sensitivity, and cost coefficiency. Elimination and nonelimination contests can be optimal under different conditions. Furthermore, we extend the equilibrium analysis to competitions with $n>4$ contestants and investigate the optimal design with numerical studies. The most interesting result is that the elimination contest with feedback from the organizer is an ideal option for a budget-constrained enterprise that seeks an innovative solution from the public for a complex innovation project. Also, the optimal number of contestants in the second stage is not always two when feedback is combined with elimination.