Let’s say your company wants a new logo. Do you 1) approach the top brand management firm in the city, and ask them to propose a couple of suggestions, 2) get two or three companies to compete in a tournament setting, or 3) launch a national competition to get as wide a selection of entrants as possible? Which one of these options you choose depends on your belief about the creative process.

Ask any management guru about the factors that drive creativity, and they will say something like: Creativity is an extraordinarily complex phenomenon that is almost entirely stimulated by intrinsic motivation instead of extrinsic pressure. They might even argue that high-powered incentives may stifle creativity by crowding out intrinsic motivation. Creatives, these gurus would say, should be left alone, free from competition, to perform their creative acts only motivated by their own artistic commitments. It really wouldn’t matter how many contestants you get; the winner will always be the one that as the most intrinsic motivation. You might as well just go for the best firm (affordable within your budget constraint) from the start.

This is classic social psychology theory, which has gained wide traction in business schools and publications like the Harvard Business Review. It is also not true.

Economists know that competition is the bedrock of a market economy, incentivising those who utilise their resources most efficiently. Those who cannot keep up with their competitors are replaced by them. Yet the belief that creative enterprises – writing literature, performing an opera, designing a logo – should not be subject to the competitive forces of the market, is widespread. Creative people, it is argued, cannot be motivated by big rewards or incentives – if anything, these may only prevent the creative juices from flowing. Competitions that aim to stimulate creativity in the workspace, for example, might actually have the opposite effect of crowding out the most creative people by those only interested in the financial rewards.

The reason for the persistence of this belief is that is it has been almost impossible to test. For one, how does one measure creativity? We can often measure the inputs to the creative process (R&D spending) or its outputs (patents, for example), but we know very little about what happens in-between.

In a new NBER Working Paper, Daniel Gross of Harvard Business School offers one possibility. He makes use of online logo design competitions to test whether competition leads to more original designs. It works like this: Firms would solicit custom designs from freelance designers who compete for a winner-take-all-prize. The prizes are typically a few hundred dollars and attract on average 35 players and 100 designs. One feature of the competition is that the firms can provide real-time feedback to the designers in the form of a one to five-star rating. Designers not only get feedback on their own work but can also see the designs and feedback on the other contestants.

Gross then uses image comparison algorisms (also used by Google Image Search software) to calculate similarity scores between pairs of images in a contest. This he uses to quantify the originality of each design relative to prior submissions by the same player and their competitors.

The firms’ ratings of the logo designs are critical to the success of the competition. Gross directly estimates a designer’s probability of winning, and show that the ratings are meaningful: ‘the highest-rated design in a contest may not always win, but a five-star design increases a player’s win probability as much as 10 four-star designs, 100 three-star designs, and nearly 2,000 one-star designs’.

And because each designer can submit their logo multiple times, Gross is able to test the effect of more or less competition on the originality of the logos. He finds that competition has large effects on the content of designers’ submissions. ‘Absent competition, positive feedback causes players (designers) to cut back sharply on originality: players with the top rating produce designs more than twice as similar to their previous entries than those with only low ratings. The effect is strongest when a player receives her first five-star rating – her next design will be a near replica of the highly-rated design – and attenuates at each rung down the ratings ladder. However, these effects are reversed by half or more when high-quality competition is present: competitive pressure counteracts this positive feedback, inducing players to produce more original designs.’

In other words, when two designers compete, and both receive five stars, they are far more likely to come up with a more creative and original design in the second round, than if they were the only one to receive a five-star rating. Competition induces creativity.

But – too much competition can also be bad. Gross finds that heavy competition discourages further investment. ‘Empirically, high performers’ tendency to produce original work is greatest when facing roughly 50-50 odds of winning – in other words, when neck-and-neck against one similar-quality competitor.’ If the firm thus gives too many five-star ratings, creativity will be limited as many designers will simply exit the competition.

There is thus a delicate ‘Goldilocks’-level of competition: too little competition, and there is no creativity; too much, and creativity is stifled by designers (and often the good ones) simply exiting the game.

The foremost lesson of these results, says Gross, is that competition can motivate creativity in professional settings, provided it is balanced. ‘In designing contracts for creative workers, managers ought thus consider incentives for high-quality work relative to that of peers or colleagues, in addition to the more traditional strategy of establishing a work environment with intrinsic motivators such as freedom, flexibility, and challenge. Note that the reward need not be pecuniary: the same intuition applies when workers value recognition or status.’

And the applications are pervasive: Need an engagement ring to stand out from the crowd? Need a dramatic music score for your advert? Need a new plan for those unfinished bridges in Cape Town? Need a new logo? If we believe Gross, then option 2 – using two or three companies to compete in a tournament setting – seems like the best bet if you want the most creative solution.

*An edited version of this article originally appeared in the 11 October edition of finweek.