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Bid Costs and Endogenous Bid Caps

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Author Info
Arieh Gavious
Benny Moldovanu
Aner Sela

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Abstract

We study contests where several privately informed agents bid for a prize. All bidders bear a cost of bidding that is an increasing function of their bids, and, moreover, bids may be capped. We show that regardless of the number of bidders, if bidders have linear or concave cost functions, then setting a bid cap is not profitable for a designer who wishes to maximize the average bid. On the other hand, if agents have convex cost functions (i.e., an increasing marginal cost), then effectively capping the bids is profitable for a designer facing a sufficiently large number of bidders. Furthermore, bid caps are effective for any number of bidders if the cost functions' degree of the convexity is large enough.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 33 (2002)
Issue (Month): 4 (Winter)
Pages: 709-722
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Handle: RePEc:rje:randje:v:33:y:2002:i:winter:p:709-722

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  1. Feess,Eberhard & Muehlheusser,Gerd & Walzl,Markus, 2004. "Unfair Contests," Research Memoranda 050, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  2. René Kirkegaard, 2007. "Comparative Statics and Welfare in Heterogeneous Contests: Bribes, Caps, and Performance Thresholds," Working Papers 0702, Brock University, Department of Economics. [Downloadable!]
  3. Todd R. Kaplan & David Wettstein, 2006. "Caps on Political Lobbying: Comment," American Economic Review, American Economic Association, vol. 96(4), pages 1351-1354, September. [Downloadable!]
  4. Konrad, Kai A & Kovenock, Dan, 2005. "Equilibrium and Efficiency in the Tug-of-War," CEPR Discussion Papers 5205, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Amegashie, J., 2007. "American Idol: Should it be a Singing Contest or a Popularity Contest?," Working Papers 2007-8, University of Guelph, Department of Economics. [Downloadable!]
  6. Alexey Malakhov & Rakesh Vohra, 2008. "Optimal auctions for asymmetrically budget constrained bidders," Review of Economic Design, Springer, vol. 12(4), pages 245-257, December. [Downloadable!] (restricted)
  7. Amegashie, J.A. & Cadsby, C.B. & Song, Y., 2005. "Competitive Burnout: Theory and Experimental Evidence," Working Papers 2005-7, University of Guelph, Department of Economics. [Downloadable!]
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  8. Alexey Malakhov & Rakesh V. Vohra, 2005. "Optimal Auctions for Asymmetrically Budget Constrained Bidders," Discussion Papers 1419, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  9. Cohen, Daniel & Sela, Aner, 2005. "Contests with Ties," CEPR Discussion Papers 5132, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Guiseppe Dari-Mattiacci & Sander Onderstal & Francesco Parisi, 2006. "Seeking Rents in the Shadow of Coase," Tinbergen Institute Discussion Papers 06-069/1, Tinbergen Institute. [Downloadable!]
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  11. Alexander Matros, 2006. "Elimination Tournaments where Players Have Fixed Resources," Working Papers 205, University of Pittsburgh, Department of Economics, revised Jan 2006. [Downloadable!]
  12. Onderstal, S., 2002. "Socially optimal mechanisms," Discussion Paper 34, Tilburg University, Center for Economic Research. [Downloadable!]
  13. Marco Runkel, 2006. "Optimal contest design, closeness and the contest success function," Public Choice, Springer, vol. 129(1), pages 217-231, October. [Downloadable!] (restricted)
  14. Rene Kirkegaard, 2008. "Favoritism in Contests: Head Starts and Handicaps," Working Papers 0805, Brock University, Department of Economics, revised Nov 2008. [Downloadable!]
  15. Roy Chowdhury, Prabal, 2006. "Controlling Collusion in Auctions: The Role of Ceilings and Reserve Prices," MPRA Paper 1503, University Library of Munich, Germany. [Downloadable!]
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  16. Aner Sela, 2002. "Contest Architecture (jointly with Benny Moldovanu)," Theory workshop papers 357966000000000088, UCLA Department of Economics. [Downloadable!]
  17. PARREIRAS, SŽrgio O. & RUBINCHIK-PESSACH, Anna, 2006. "Contests with heterogeneous agents," CORE Discussion Papers 2006004, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  18. William Stein & Amnon Rapoport, 2005. "Symmetric two-stage contests with budget constraints," Public Choice, Springer, vol. 124(3), pages 309-328, September. [Downloadable!] (restricted)
  19. Cohen, Chen & Sela, Aner, 2005. "Allocation of Prizes in Asymmetric All-Pay Auctions," CEPR Discussion Papers 4951, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  20. Nicolas Sahuguet, 2006. "Caps in asymmetric all-pay auctions with incomplete information," Economics Bulletin, Economics Bulletin, vol. 3(9), pages 1-8. [Downloadable!]
  21. Ivan Pastine & Tuvana Pastine, 2006. "Politician Preferences and Caps on Political Lobbying," Working Papers 200619, School Of Economics, University College Dublin. [Downloadable!]
    Other versions:
  22. Matejka, M. & Onderstal, S. & De Waegenaere, A., 2002. "The effectiveness of caps on political lobbying," Discussion Paper 44, Tilburg University, Center for Economic Research. [Downloadable!]
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