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All-Pay Auctions: Implementation and Optimality

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  • Jönsson, Stefan
  • Schmutzler, Armin

Abstract

This paper analyzes how all-pay auctions with endogenous prizes can be used to provide effort incentives. We show that wide classes of effort distributions can be implemented as equilibrium outcomes of such games. We also ask how all-pay auctions have to be structured so as to induce high expected highest efforts without generating excessive wasteful efforts of losers. All-pay auctions with endogenous prizes can do better than all-pay auctions with fixed prizes in this respect, in particular, when the prize function is approximately linear. We use the results to compare patents and prizes as innovation incentives, and to explore promotion incentives in organizations.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9323.

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Date of creation: Jan 2013
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Handle: RePEc:cpr:ceprdp:9323

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Keywords: all-pay auctions; contests; endogenous prizes; implementation;

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References

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  1. Kaplan, Todd, et al, 2002. "All-Pay Auctions with Variable Rewards," Journal of Industrial Economics, Wiley Blackwell, vol. 50(4), pages 417-30, December.
  2. Kaplan, Todd R. & Luski, Israel & Wettstein, David, 2003. "Innovative activity and sunk cost," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1111-1133, October.
  3. Konrad, Kai A., 2009. "Strategy and Dynamics in Contests," OUP Catalogue, Oxford University Press, number 9780199549603, October.
  4. Benny Moldovanu & Aner Sela, 2001. "The Optimal Allocation of Prizes in Contests," American Economic Review, American Economic Association, vol. 91(3), pages 542-558, June.
  5. Donja Darai & Dario Sacco & Armin Schmutzler, 2009. "Competition and Innovation: An Experimental Investigation," SOI - Working Papers 0608, Socioeconomic Institute - University of Zurich, revised Apr 2007.
  6. Baye, Michael R. & Kovenock, Dan & Vries, Casper G. de, 2009. "Contests with rank-order spillovers," Discussion Papers, Research Unit: Market Processes and Governance SP II 2009-09, Social Science Research Center Berlin (WZB).
  7. Ron Siegel, 2010. "Asymmetric Contests with Conditional Investments," American Economic Review, American Economic Association, vol. 100(5), pages 2230-60, December.
  8. Chung, Tai-Yeong, 1996. " Rent-Seeking Contest When the Prize Increases with Aggregate Efforts," Public Choice, Springer, vol. 87(1-2), pages 55-66, April.
  9. Cohen, Chen & Kaplan, Todd & Sela, Aner, 2004. "Optimal Rewards in Contests," CEPR Discussion Papers 4704, C.E.P.R. Discussion Papers.
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Cited by:
  1. David Pérez-Castrillo & David Wettstein, 2012. "Innovation Contests," Working Papers 654, Barcelona Graduate School of Economics.

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