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When less is more: Rationing and rent dissipation in stochastic contests

  • Faravelli, Marco
  • Stanca, Luca

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 where all bidders value the prize equally. We show that, whenever a Tullock contest yields under-dissipation, the auctioneerʼs revenue can be increased by optimally fixing the number of tickets. In particular, in a stochastic contest with proportional probabilities, it is possible to 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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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 74 (2012)
Issue (Month): 1 ()
Pages: 170-183

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Handle: RePEc:eee:gamebe:v:74:y:2012:i:1:p:170-183
DOI: 10.1016/j.geb.2011.05.008
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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