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Differential Prize Taxation and Structural Discrimination in Contests

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  • Yosef Mealem
  • Shmuel Nitzan

Abstract

This paper evaluates differential prize taxation and structural discrimination as a means of increasing efforts in the most widely studied contests. We establish that a designer who maximizes efforts subject to a balanced-budget constraint prefers dual discrimination, namely, change of the contestants’ prize valuations as well as bias of the impact of their efforts. Optimal twofold discrimination is often superior to any single mode of discrimination under any lottery. Surprisingly, in the general N-player contest game, under the prototypical simple lottery, it can yield the maximal possible efforts: the highest valuation of the contested prize. If a single mode of discrimination is allowed, then differential taxation is superior to structural discrimination.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3831.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3831

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Keywords: contest design; balanced-budget-constraint; differential prize taxation; structural discrimination; dual polarized discrimination; contest success function; lottery;

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References

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  1. Clark, Derek J. & Riis, Christian, 2000. "Allocation efficiency in a competitive bribery game," Journal of Economic Behavior & Organization, Elsevier, vol. 42(1), pages 109-124, May.
  2. Jörg Franke & Christian Kanzow & Wolfgang Leininger & Alexandra Schwartz, 2013. "Effort maximization in asymmetric contest games with heterogeneous contestants," Economic Theory, Springer, vol. 52(2), pages 589-630, March.
  3. Nti, Kofi O., 2004. "Maximum efforts in contests with asymmetric valuations," European Journal of Political Economy, Elsevier, vol. 20(4), pages 1059-1066, November.
  4. Fang, Hanming, 2002. " Lottery versus All-Pay Auction Models of Lobbying," Public Choice, Springer, vol. 112(3-4), pages 351-71, September.
  5. Luis Corchón & Matthias Dahm, 2010. "Foundations for contest success functions," Economic Theory, Springer, vol. 43(1), pages 81-98, April.
  6. Lien, Da-Hsiang Donald, 1990. "Corruption and allocation efficiency," Journal of Development Economics, Elsevier, vol. 33(1), pages 153-164, July.
  7. Epstein, Gil S. & Mealem, Yosef & Nitzan, Shmuel, 2010. "Political Culture and Discrimination in Contests," IZA Discussion Papers 5158, Institute for the Study of Labor (IZA).
  8. Franke, Jörg, 2012. "Affirmative action in contest games," European Journal of Political Economy, Elsevier, vol. 28(1), pages 105-118.
  9. Yosef Mealem & Shmuel Nitzan, 2014. "Equity and effectiveness of optimal taxation in contests under an all-pay auction," Social Choice and Welfare, Springer, vol. 42(2), pages 437-464, February.
  10. Richard Cornes & Roger Hartley, 2002. "Asymmetric Contests with General Technologies," Keele Economics Research Papers KERP 2002/22, Centre for Economic Research, Keele University.
  11. Stein, William E, 2002. " Asymmetric Rent-Seeking with More Than Two Contestants," Public Choice, Springer, vol. 113(3-4), pages 325-36, December.
  12. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(3), pages 573-605, June.
  13. Baye, Michael R. & Hoppe, Heidrun C., 2003. "The strategic equivalence of rent-seeking, innovation, and patent-race games," Games and Economic Behavior, Elsevier, vol. 44(2), pages 217-226, August.
  14. Gil S. Epstein & Yosef Mealem & Shmuel Nitzan, 2013. "Lotteries vs. All-Pay Auctions in Fair and Biased Contests," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 25(1), pages 48-60, 03.
  15. Skaperdas, Stergios, 1996. "Contest Success Functions," Economic Theory, Springer, vol. 7(2), pages 283-90, February.
  16. Alcalde, José & Dahm, Matthias, 2010. "Rent seeking and rent dissipation: A neutrality result," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 1-7, February.
  17. Johannes Münster, 2009. "Group contest success functions," Economic Theory, Springer, vol. 41(2), pages 345-357, November.
  18. Christian Riis & Derek J. Clark, 1997. "Contest success functions: an extension," Economic Theory, Springer, vol. 11(1), pages 201-204.
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