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Optimal prizes in dynamic elimination contests: Theory and experimental evidence

  • Rudi Stracke

    ()

  • Wolfgang Höchtl

    ()

  • Rudolf Kerschbamer

    ()

  • Uwe Sunde

    ()

This paper investigates the implications of different prize structures on effort provision in dynamic (two-stage) elimination contests. Theoretical results show that, for risk-neutral participants, a structure with a single prize for the winner of the contest maximizes total effort, while a structure with two appropriately chosen prizes (a runner-up prize and a final prize) ensures incentive maintenance across stages. In contrast, a structure with two prizes may dominate a winner-takes-all contest in both dimensions if participants are risk-averse. Evidence from laboratory experiments is largely consistent with these predictions, suggesting that contest design should account for risk attitudes of participants.

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Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2014-08.

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Length: 28
Date of creation: Mar 2014
Handle: RePEc:inn:wpaper:2014-08
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