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When Less is More: Rationing and Rent Dissipation in Stochastic Contests

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  • Marco Faravelli
  • Luca Stanca

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Abstract

This paper shows how to maximize revenue when a contest is noisy. We consider a case where two or more contestants bid for a prize in a stochastic contest with proportional probabilities, where all bidders value the prize equally. We show that by fixing the number of tickets, thus setting a limit to total expenditures, it is possible to maximize the auctioneer's revenue and obtain (almost) full rent dissipation. We test this hypothesis with a laboratory experiment. The results indicate that, as predicted, revenue is significantly higher in a lottery with rationing than in a standard lottery. On the other hand, an alternative rationing mechanism that does not limit total expenditures fails to increase revenue relative to a standard lottery.

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper197.pdf
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Bibliographic Info

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 197.

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Length: 26 pages
Date of creation: Sep 2010
Date of revision: Sep 2010
Handle: RePEc:mib:wpaper:197

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Keywords: Stochastic Contests; Rent Seeking; Laboratory Experiments;

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References

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Citations

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Cited by:
  1. Roman M. Sheremeta, 2013. "Overbidding and Heterogeneous Behavior in Contest Experiments," Working Papers 13-06, Chapman University, Economic Science Institute.
  2. Fallucchi, Francesco & Renner, Elke & Sefton, Martin, 2013. "Information feedback and contest structure in rent-seeking games," European Economic Review, Elsevier, vol. 64(C), pages 223-240.
  3. Ian A. MacKenzie & Markus Ohndorf, 2013. "Caps on Coasean Transfers," Discussion Papers Series 485, School of Economics, University of Queensland, Australia.

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