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Optimal Favoritism in All-Pay Auctions and Lottery Contests

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  • Jörg Franke
  • Wolfgang Leininger
  • Cédric Wasser

Abstract

We analyze the revenue-enhancing potential of favoring specific contestants in complete information all-pay auctions and lottery contests with several heterogeneous contestants. Two instruments of favoritism are considered: Head starts that are added to the bids of specific contestants and multiplicative biases that give idiosyncratic weights to the bids. In the all-pay auction, head starts are more effective than biases while optimally combining both instruments even yields first-best revenue. In the lottery contest, head starts are less effective than biases and combining both instruments cannot further increase revenue. As all-pay auctions revenue-dominate lottery contests under optimal biases, we thus obtain an unambiguous revenue-ranking of all six combinations of contest formats and instruments.

Suggested Citation

  • Jörg Franke & Wolfgang Leininger & Cédric Wasser, 2016. "Optimal Favoritism in All-Pay Auctions and Lottery Contests," CESifo Working Paper Series 6274, CESifo.
  • Handle: RePEc:ces:ceswps:_6274
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    Cited by:

    1. Alcalde, José & Dahm, Matthias, 2020. "Affirmative Action Through Endogenous Set-Asides," QM&ET Working Papers 20-1, University of Alicante, D. Quantitative Methods and Economic Theory.
    2. Franke, Jörg & Leininger, Wolfgang & Wasser, Cédric, 2018. "Optimal favoritism in all-pay auctions and lottery contests," European Economic Review, Elsevier, vol. 104(C), pages 22-37.
    3. Igor Letina & Shuo Liu & Nick Netzer, 2020. "Optimal Contest Design: A General Approach," Diskussionsschriften dp2011, Universitaet Bern, Departement Volkswirtschaft.
    4. Derek J. Clark & Tore Nilssen, 2021. "Competitive balance when winning breeds winners," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 56(2), pages 363-384, February.
    5. Clark, Derek J. & Nilssen, Tore, 2018. "Keep on fighting: The dynamics of head starts in all-pay auctions," Games and Economic Behavior, Elsevier, vol. 110(C), pages 258-272.
    6. Matthias Dahm, 2017. "All-Pay Auctions with Extra Prize: A Partial Exclusion Principle," Discussion Papers 2017-01, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    7. José Alcalde & Matthias Dahm, "undated". "Supplier Diversity before the Time of Cholera," Discussion Papers in Economics 20/07, Division of Economics, School of Business, University of Leicester.
    8. Samuel Häfner & Georg Nöldeke, 0. "Sorting in iterated incumbency contests," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 0, pages 1-38.
    9. Subhasish M. Chowdhury & Patricia Esteve-González & Anwesha Mukherjee, 2020. "Heterogeneity, Leveling the Playing Field, and Affirmative Action in Contests," Economics Series Working Papers 915, University of Oxford, Department of Economics.
    10. René Kirkegaard, 2020. "Microfounded Contest Design," Working Papers 2003, University of Guelph, Department of Economics and Finance.
    11. Malin Arve & Olga Chiappinelli, 2018. "The Role of Budget Contraints in Sequential Elimination Tournaments," Discussion Papers of DIW Berlin 1777, DIW Berlin, German Institute for Economic Research.
    12. Clark, Derek J. & Nilssen, Tore, 2020. "Creating balance in dynamic competitions," International Journal of Industrial Organization, Elsevier, vol. 69(C).
    13. Clark, Derek J. & Nilssen, Tore, 2018. "Beating the Matthew Effect: Head Starts and Catching Up in a Dynamic All-Pay Auction," Memorandum 2/2018, Oslo University, Department of Economics.
    14. Tomohiko Kawamori, 2020. "Extractive contest design," Papers 2006.01808, arXiv.org, revised Jun 2020.
    15. Derek J. Clark & Tore Nilssen & Jan Yngve Sand, 2020. "Gaining advantage by winning contests," Review of Economic Design, Springer;Society for Economic Design, vol. 24(1), pages 23-38, June.

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    More about this item

    Keywords

    all-pay auction; lottery contest; favoritism; head start; revenue dominance;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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