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Lottery versus All-Pay Auction Contests: A Revenue Dominance Theorem

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  • Franke, Jörg
  • Kanzow, Christian
  • Leininger, Wolfgang
  • Schwartz, Alexandra

Abstract

We allow a contest organizer to bias a contest in a discriminatory way; i.e., she can favor specific contestants by designing the contest rule in order to maximize total equilibrium effort (resp. revenue). The two predominant contest regimes are considered, all-pay auctions and lottery contests. For all-pay auctions the optimal bias is derived in closed form: It implies extreme competitive pressure among active contestants and low endogenous entry. Moreover, the exclusion principle advanced by Baye et al. (1993) becomes obsolete in this case. In contrast, the optimally biased lottery induces larger entry of contestants due to softer competition. Our main result regarding total revenue comparison under the optimal biases reveals that the all-pay auction revenue dominates the lottery contest for all levels of heterogeneity among contestants. The incentive effect due to a strongly discriminating contest rule (all-pay auction) dominates the participation effect due to a weakly discriminating contest rule (lottery). --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79998.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79998

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References

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  1. Ian Gale & Mark Stegeman, 1994. "Exclusion in all-pay auctions," Working Paper 9401, Federal Reserve Bank of Cleveland.
  2. Dan Kovenock & Michael R. Baye & Casper G. de Vries, 1996. "The all-pay auction with complete information (*)," Economic Theory, Springer, vol. 8(2), pages 291-305.
  3. Yeon-Koo Che & Ian Gale, 2003. "Optimal Design of Research Contests," American Economic Review, American Economic Association, vol. 93(3), pages 646-671, June.
  4. Gil S. Epstein & Yosef Mealem & Shmuel Nitzan, 2013. "Lotteries vs. All-Pay Auctions in Fair and Biased Contests," Economics and Politics, Wiley Blackwell, vol. 25(1), pages 48-60, 03.
  5. 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).
  6. Baye, M.R. & Kovenock, D. & De Vries, C.G., 1991. "Rigging The Lobbying Process: An Application Of The All- Pay Auction," Purdue University Economics Working Papers 1002, Purdue University, Department of Economics.
  7. Ron Siegel, 2010. "Asymmetric Contests with Conditional Investments," American Economic Review, American Economic Association, vol. 100(5), pages 2230-60, December.
  8. Arye L. Hillman & John G. Riley, 1987. "Politically Contestable Rents and Transfers," UCLA Economics Working Papers 452, UCLA Department of Economics.
  9. Qiang Fu, 2006. "A Theory of Affirmative Action in College Admissions," Economic Inquiry, Western Economic Association International, vol. 44(3), pages 420-428, July.
  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. Franke, Jörg, 2012. "Affirmative action in contest games," European Journal of Political Economy, Elsevier, vol. 28(1), pages 105-118.
  12. 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.
  13. Qiang Fu & Jingfeng Lu, 2010. "Contest Design And Optimal Endogenous Entry," Economic Inquiry, Western Economic Association International, vol. 48(1), pages 80-88, 01.
  14. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June.
  15. Rene Kirkegaard, 2008. "Favoritism in Contests: Head Starts and Handicaps," Working Papers 0805, Brock University, Department of Economics, revised Nov 2008.
  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. Konrad, Kai A., 2009. "Strategy and Dynamics in Contests," OUP Catalogue, Oxford University Press, number 9780199549603, September.
  18. Stein, William E, 2002. " Asymmetric Rent-Seeking with More Than Two Contestants," Public Choice, Springer, vol. 113(3-4), pages 325-36, December.
  19. Kirkegaard, René, 2012. "Favoritism in asymmetric contests: Head starts and handicaps," Games and Economic Behavior, Elsevier, vol. 76(1), pages 226-248.
  20. Fang, Hanming, 2002. " Lottery versus All-Pay Auction Models of Lobbying," Public Choice, Springer, vol. 112(3-4), pages 351-71, September.
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Cited by:
  1. J. Atsu Amegashie, 2012. "A Nested Contest: Tullock Meets the All-pay Auction," CESifo Working Paper Series 3976, CESifo Group Munich.
  2. Gil S. Epstein & Yosef Mealem, 2013. "Politicians, Governed vs. Non-Governed Interest Groups and Rent Dissipation," Working Papers 2013-09, Department of Economics, Bar-Ilan University.
  3. 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.
  4. Jörg Franke & Wolfgang Leininger, 2013. "On the Efficient Provision of Public Goods by Means of Lotteries," CESifo Working Paper Series 4109, CESifo Group Munich.
  5. Alexander Matros & Alex Possajennikov, . "Common Value Allocation Mechanisms with Private Information: Lotteries or Auctions?," Discussion Papers 2014-07, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  6. Amegashie, J. Atsu, 2012. "A nested contest: Tullock meets the All-Pay Auction," MPRA Paper 41654, University Library of Munich, Germany, revised 03 Sep 2012.
  7. Yosef Mealem & Shmuel Nitzan, 2013. "Direct and Structural Discrimination in Contests," CESifo Working Paper Series 4518, CESifo Group Munich.

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