Contest design and optimal endogenous entry
AbstractThis paper derives the effort-maximizing contest rule and the optimal endogenous entry in a context where potential participants bear fixed entry costs. The organizer is allowed to design the contest under a fixed budget with two strategic instruments: he sets the value of the prize purse, and arranges a monetary transfer (entry subsidy or fee) for each participating contestant. In other words, the budget can either be used to subsidize participation or an entry fee can be charged to fund the prize purse. The results show that the optimally designed contest attracts exactly two participating contestants in its unique subgame perfect equilibrium (when there is a positive fixed entry cost) and extracts all the surplus from participating contestants. The study also shows that the direction and amount of the monetary transfer depend on the magnitude of the entry cost: the contest organizer subsidizes entry when contestants bear substantial entry costs, but charges an entry fee to fund the prize purse whenever the entry cost is sufficiently low.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 945.
Date of creation: Nov 2006
Date of revision:
Contest; Endogenous Entry; Entry Cost; Subsidy; Entry Fee;
Other versions of this item:
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-01 (All new papers)
- NEP-COM-2006-12-01 (Industrial Competition)
- NEP-IND-2006-12-01 (Industrial Organization)
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