R&D contest design with resource allocation and entry fees

Abstract

This paper explores the design of an R&D contest by a sponsor who can charge entry fees and allocate a fixed amount of productive resources across firms—e.g., access to computing infrastructure or laboratory equipment. The revenues collected through entry fees can fund the prize awarded to the winner. The posted prize, entry fees, and productive resources promised to potential entrants jointly determine firms’ decisions to enter the competition and their effort supply. We characterize the respective optimal contests for two objectives: (i) maximizing total effort in the contest and (ii) maximizing the expected quality of the winning product. We show that the optimal contest induces the entry of only the two most efficient firms when the sponsor can jointly set entry fees and allocate productive resources. The resource allocation plan in the optimum may favor the initially more competent firm and thus promote a “national champion” instead of leveling the playing field, and the optimum depends on the nature of the R&D task and effort cost profiles of the firms. Our analysis sheds light on the roles played by these instruments in shaping optimal research contests.