Competitive Problem Solving and the Optimal Prize Schemes

Abstract

Agents compete to solve a problem. Each agent knows own computational capacity as private information and simultaneously chooses either a risky or a safe problem solving method. This paper analyzes the optimal prize schemes from the perspective of the prize designer who wishes to find a solution as quick as possible. It is shown that (i) the winner- take-all scheme can induce excessive risk taking and make problem solving slower (ii) prize schemes with milder competitive pressure induce the optimal risk taking and quicker problem solving.Optimal prize scheme, Risk taking, Problem solving