Diversification and information in contests

Abstract

AbstractWe study contests with technological uncertainty, where contestants can invest in different technologies of uncertain value. The principal, who is also uncertain about the value of the technologies, can disclose an informative yet noisy public signal about the merit of each technology. The signal can focus contestants’ investments into more promising technologies or increase diversification. We characterize the principal’s optimal disclosure of information about the technologies, which depends on the value of diversification, the informativeness of available signals, and the ex-ante beliefs of the likelihood of success for each technology. We also find that under some conditions offering larger prizes or having more contestants decreases the extent of information disclosure.