Innovation Tournaments with Multiple Contributors

Abstract

This paper considers the normative implications of technical change for tax policy design. A task-to-talent assignment model of the labor market is embedded into an optimal tax problem. Technical change modifies equilibrium wage growth across talents and the substitutability of talents across tasks. The overall optimal policy response is to reduce marginal income taxes on low to middle incomes, while raising those on middle to high incomes. The reform favors those in the middle of the income distribution, reducing their average taxes while lowering transfers to those at the bottom. (JEL D31, H21, H23, H24, J31, O33) Technical change is inherently redistributive, complementing the labor of some whilst substituting for that of others. A large positive literature has analyzed its impact on the wage distribution. This literature has emphasized skill-biased technical change that favors the skilled over the unskilled and, more recently, has stressed the role of technical change in replacing "routine labor" in the middle of the wage distribution. However, while the positive literature documenting the redistributive nature of technical change is extensive, normative work exploring the policy implications of such change is not. 1 Our paper fills this gap. We explore how more than 30 years of technical change in the United States has affected the policy recommendations that economic theory provides. Overall, we find that such change creates a rationale for a modest adjustment of optimal policy in a direction that favors middle income earners, reducing their average taxes while lowering transfers to those at the bottom. Optimal marginal taxes are reduced on incomes that are low (but not the lowest) and raised on incomes that are high (but not the highest). Although, the

Optimal Award Scheme in Innovation Tournaments

“…Our first research question is when an organizer should grant the entire prize to the best submission (i.e., select a winner-take-all (WTA) award scheme) and when he should not. For this question, prior literature assumes the WTA scheme a priori (e.g., Taylor 1995, Fullerton and McAfee 1999, Kim and Lim 2015, Ales et al 2016, proves its optimality when uncertainty in an agent's solution quality is modeled with logistic or uniform distribution (Kalra and Shi 2001), or shows that it outperforms an alternative scheme that awards the winner and/or the runner-up under Gumbel distribution (Terwiesch and Xu 2008). 1 Yet, in practice, we observe both WTA and multiple-prize tournaments.…”

“…As in Ales et al (2016), we consider the general model where the organizer benefits from K (∈ {1, 2, . .…”

“…This is the standard approach to analyzing an award scheme in the extant literature (Moldovanu and Sela 2001, Kalra and Shi 2001, Terwiesch and Xu 2008. Ales et al (2016) and Korpeoglu and Cho (2017) further study when it is optimal for the organizer to have an open tournament with free entry or to restrict entry under the WTA scheme. In a free-entry open tournament that allows all agents who wish to participate to do so, N corresponds to a pool of agents who can potentially participate in the tournament.…”

Sourcing Innovation: Public and Private Feedback in Contests

“…Closer to our work are those studies that consider a combined deterministic and stochastic relationship between actions and outcomes. This approach has gained traction among those who study contests in the context of innovation (e.g., Terwiesch and Xu 2008, Terwiesch and Ulrich 2009, Ales et al 2014, Körpeoglu and Cho 2015. These researchers have also shifted the focus from fostering average performance to maximizing the best entry's performance.…”

“…Another prominent issue is the optimal award structure. Conditions for the optimality of one prize versus many prizes depend on the solvers' cost function (Moldovanu and Sela 2001), on performance uncertainty (Ales et al 2014), and on whether the firm is seeking the best solution or merely to improve the average solution (Moldovanu and Sela 2006). Another perspective is offered by Che and Gale (2003) who discuss menus of prizes.…”