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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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