Crowdsourcing Contests: A Dynamic Structural Model of the Impact of Incentive Structure on Solution Quality

A key challenge faced by firms that undertake crowdsourcing-contests to get solutions from crowds to their problems is to design an incentive structure which helps attract high quality solutions. We develop a structural model of user participation in crowdsourcing-contests and present empirical evidence on how incentive structure could affect the quality of solutions. Using data from Threadless.com, we find that participants exert less effort as competition for the reward increases. This indicates that increasing the reward may adversely affect the quality of the solutions produced as it will increase the competition. However, counter-intuitively the policy simulations indicate that increasing the reward increases both the quantity and quality of submitted solutions. This is because under the new policy of higher reward, individual equilibrium behavior is different. When the firm increases the reward, the additional utility from increase in the reward offsets the reduction in probability of winning due to intensified competition.