Awarding scarce ideas in innovation contests

Innovation contests are growing in popularity as more firms see them as a way to enhance their R&D capacity. This paper studies the relationship between optimal award and scarcity of ideas in innovation contests. We find that this relationship critically depends on the market value of the innovation, specifically on the marginal value of solution quality for the seeker.

The optimal award is increasing in the scarcity of good ideas if and only if the marginal value of innovation quality is low enough. Moreover, the optimal award is always lower than the efficient level.