Dynamic Development Contests

Abstract

Public, private, and not-for-profit organizations find advanced technology and product development projects challenging to manage due to the time and budget pressures, and turn to their development partners and suppliers to address their development needs. We study how dynamic development contests with enriched rank-based incentives and carefully-tailored information design can help these organizations outsource their development projects at the minimum project lead time by stimulating competition among suppliers. We show that an organization can use dynamically adjusted flexible rewards to achieve the absolute minimum expected project lead time at a significantly lower cost than a fixed-reward policy. Importantly, our flexible-reward policy pays the absolute minimum expected reward (i.e., achieves the first best). We further study the case where the organization does not have sufficient budget to offer a reward that attains the absolute minimum expected lead time. We propose that in this case, the organization can dynamically increase the contest reward until its budget constraint binds and then use information sharing as a strategic tool to incentivize suppliers. Specifically, we propose an easy-to-implement random-update policy where the organization periodically monitors the status of suppliers at random times and immediately discloses any partial progress. We show that such a random-update policy outperforms other canonical information disclosure strategies. Our results indicate that dynamic rewards and strategic information disclosure are powerful tools to help organizations outsource their development needs swiftly and cost effectively.