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Winner-Take-All and Proportional-Prize Contests: Theory and Experimental Results

Author

Listed:
  • Roman M. Sheremeta

    (Argyros School of Business and Economics, Chapman University)

  • William A. Masters

    (Department of Food and Nutrition Policy, Tufts University)

  • Timothy N. Cason

    (Department of Economics, Krannert School of Management, Purdue University)

Abstract

This study provides a unified theoretical and experimental framework in which to compare three canonical types of competition: winner-take-all contests won by the best performer, winner-take-all lotteries where probability of success is proportional to performance, and proportional-prize contests in which rewards are shared in proportion to performance. We introduce random noise to reflect imperfect information, and collect independent measures of risk aversion, other-regarding preferences, and the utility of winning a contest. The main finding is that efforts are consistently higher with winner-take-all contests. The lottery contests have the same Nash equilibrium as proportional prizes, but induce contestants to choose higher efforts and receive lower, more unequal payoffs. This result may explain why contest designers who seek only to elicit effort offer lump-sum prizes, even though contestants would be better off with proportional rewards.

Suggested Citation

  • Roman M. Sheremeta & William A. Masters & Timothy N. Cason, 2012. "Winner-Take-All and Proportional-Prize Contests: Theory and Experimental Results," Working Papers 12-04, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:12-04
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    More about this item

    Keywords

    contests; rent-seeking; lotteries; incentives in experiments; risk aversion;
    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
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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