Abstract
This paper studies an innovation tournament in which an organizer seeks solutions to an innovation-related problem from a number of independent agents. While agents exert efforts to improve their solutions, their outcomes are uncertain. We call an agent whose ex-post output contributes to the organizer's utility a contributor. We analyze a general model of uncertainty and utility functions with multiple contributors, and we show that these two factors play a crucial role in decision-making of agents and the organizer. Specifically, contrary to existing theories, increased competition in a tournament can have a positive impact on agents' incentives to exert effort when agents expect good outcomes with high likelihood, and a free-entry open tournament should be encouraged only when the problem is highly uncertain or the organizer seeks diverse solutions from many contributors. Our results are consistent with recent empirical evidence, hence helping to close a gap in the extant literature between theory and practice.
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