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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. Francesco Fallucchi & Elke Renner & Martin Sefton, 2012. "Information Feedback and Contest Structure in Rent-Seeking Games," Discussion Papers 2012-12, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  2. Sheremeta, Roman, 2013. "Overbidding and Heterogeneous Behavior in Contest Experiments," MPRA Paper 44124, University Library of Munich, Germany.
  3. Francesco Fallucchi & Elke Renner & Martin Sefton, 2013. "Information feedback and contest structure in rent-seeking games," Discussion Papers 2013-02, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.

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