Rewarding the Few or the Many? An Investigation of the Impact of Rewards in Open Innovation Contests

Pinar Yildirim, Marketing, The Wharton School; Reto Hofstetter, University of Lucerne; and Z. John Zhang, Marketing, The Wharton School

Abstract: In this study, we examine the impact of financial incentives on participation and quality of submitted ideas in crowd-sourced innovation contests. We compare three commonly used contest designs that vary with respect to the number of winners and how the total reward is distributed:  winner takes all (WTA), equally shared reward (ES, where n winners share a reward equally), and rank proportional rewards (RP, where n winners share a reward proportionally based on their ranking). We show that how the rewards are distributed amongst the winners will affect who participates in a contest and the quality of ideas submitted. We find that different financial incentive schemes are better for achieving different  objectives.  In particular,  when the total reward is sufficiently large relative to the cost of participating in a contest, WTA  is best at encouraging participation but not at generating ideas of the highest average quality in an open innovation platform.  When the reward is small, the highest par- ticipation  is achieved through RP. On the other hand, ES yields the highest average quality of submissions and the lowest participation when the reward is large. We use data from to test our model predictions and our empirical findings are largely consistent with our theoretical conclusions.

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