Scarcity of Ideas and Optimal Prizes in Innovation Contests

This paper studies the relationship between optimal prizes and scarcity of ideas in innovation contests. We consider a model where both ideas and effort are integral parts of the innovation process. Contest participants are privately informed about their idea quality. We introduce a new stochastic order to rank scarcity of ideas and study how a contest designer's choice--maximizing prize--should vary with scarcity of ideas. We fi nd that scarcity of ideas results in higher optimal prizes if and only if the bene t from a marginal improvement in the new technology's performance is sufficiently low