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Optimal Contest Design: Tuning the Heat

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  • Letina, Igor
  • Liu, Shuo
  • Netzer, Nick

Abstract

We consider the design of contests when the principal can choose both the prize profile and how the prizes are allocated as a function of a possibly noisy signal about the agents’ efforts. We provide sufficient conditions that guarantee optimality of a contest. Optimal contests have a minimally competitive prize profile and an intermediate degree of competitiveness in the contest success function. Whenever observation is not too noisy, the optimum can be achieved by an all-pay auction with a cap. When observation is perfect, the optimum can also be achieved by a nested Tullock contest. We relate our results to a recent literature which has asked similar questions but has typically focused on the design of either the prize profile or the contest success function.

Suggested Citation

  • Letina, Igor & Liu, Shuo & Netzer, Nick, 2022. "Optimal Contest Design: Tuning the Heat," CEPR Discussion Papers 14854, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14854
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    Cited by:

    1. Thomas Giebe & Oliver Gürtler, 2024. "Player Strength and Effort in Contests," ECONtribute Discussion Papers Series 285, University of Bonn and University of Cologne, Germany.
    2. Enzo Brox & Daniel Goller, 2024. "Tournaments, Contestant Heterogeneity and Performance," Papers 2401.05210, arXiv.org, revised Oct 2024.
    3. Fu, Qiang & Wu, Zenan & Zhu, Yuxuan, 2022. "On equilibrium existence in generalized multi-prize nested lottery contests," Journal of Economic Theory, Elsevier, vol. 200(C).
    4. Sumit Goel, 2022. "Optimal grading contests," Papers 2205.05207, arXiv.org, revised Nov 2024.
    5. Lu, Jingfeng & Shen, Bo & Wang, Zhewei, 2024. "Performance bundling in multi-dimensional competitions," International Journal of Industrial Organization, Elsevier, vol. 95(C).
    6. Fu, Qiang & Wu, Zenan & Zhu, Yuxuan, 2023. "On equilibrium uniqueness in generalized multi-prize nested lottery contests," Games and Economic Behavior, Elsevier, vol. 139(C), pages 180-199.
    7. Huang, Ying & Jiao, Qian & Shen, Bo & Sun, Xiang, 2023. "Conflicts in regular networks," Journal of Mathematical Economics, Elsevier, vol. 106(C).
    8. Penghuan Yan, 2024. "Balancing Selection Efficiency and Societal Costs in Selective Contests," Papers 2409.09768, arXiv.org, revised Oct 2024.

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    More about this item

    Keywords

    Contest design; Optimal contests; Tournaments;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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