The Optimal Design of Rewards in Contests

Using contests to generate innovation has and is widely used. Such contests often involve o¤ering a prize that depends upon the accom-plishment (e¤ort). Using an all-pay auction as a model of a contest, we determine the optimal reward for inducing innovation. In a symmet-ric environment, we \u85nd that the reward should be set to c(x)=c0(x) where c is the cost of producing an innovation of level x: In an asym-metric environment with two \u85rms, we \u85nd that it is optimal to set di¤erent rewards for each \u85rm. There are cases where this can be replicated by a single reward that depends upon accomplishments of both contestants