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Equity and Effectiveness of Optimal Taxation in Contests under an All-Pay Auction

  • Yosef Mealem
  • Shmuel Nitzan

The means of contest design may include differential taxation of the prize. This paper establishes that, given a revenue-maximizing contest designer who faces a balanced-budget constraint, the optimal taxation scheme corresponding to an all-pay auction is appealing in two senses. First, it ensures exceptional equitable final prize valuations. Second, it is effective; it yields total contestants’ efforts that are larger than those obtained under almost any Tullock-type lottery. Furthermore, when a budget surplus is allowed, the superiority of optimal taxation under the APA is preserved in terms of equity and effectiveness relative to optimal taxation under any contest success function.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3712.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3712
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  5. 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.
  6. Jörg Franke & Christian Kanzow & Wolfgang Leininger & Alexandra Schwartz, 2012. "Lottery versus All-Pay Auction Contests – A Revenue Dominance Theorem," Ruhr Economic Papers 0315, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  7. Luis Corchon & Matthias Dahm, 2007. "Foundations For Contest Success Functions," Economics Working Papers we070401, Universidad Carlos III, Departamento de Economía.
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  11. Bos, Olivier, 2011. "How lotteries outperform auctions," Economics Letters, Elsevier, vol. 110(3), pages 262-264, March.
  12. Baye, Michael R & Kovenock, Dan & de Vries, Casper G, 1993. "Rigging the Lobbying Process: An Application of the All-Pay Auction," American Economic Review, American Economic Association, vol. 83(1), pages 289-94, March.
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  15. Li, Sanxi & Yu, Jun, 2012. "Contests with endogenous discrimination," Economics Letters, Elsevier, vol. 117(3), pages 834-836.
  16. Fang, Hanming, 2002. " Lottery versus All-Pay Auction Models of Lobbying," Public Choice, Springer, vol. 112(3-4), pages 351-71, September.
  17. 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.
  18. Stein, William E, 2002. " Asymmetric Rent-Seeking with More Than Two Contestants," Public Choice, Springer, vol. 113(3-4), pages 325-36, December.
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  22. Franke, Jörg, 2012. "Affirmative action in contest games," European Journal of Political Economy, Elsevier, vol. 28(1), pages 105-118.
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