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

Author

Listed:
  • Yosef Mealem
  • Shmuel Nitzan

Abstract

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.

Suggested Citation

  • Yosef Mealem & Shmuel Nitzan, 2012. "Equity and Effectiveness of Optimal Taxation in Contests under an All-Pay Auction," CESifo Working Paper Series 3712, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3712
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    References listed on IDEAS

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    More about this item

    Keywords

    contest design; revenue maximization; balanced-budget constraint; budget surplus; optimal differential taxation; endogenous stakes; all-pay auction; lottery;

    JEL classification:

    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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