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When Less is More: Rationing and Rent Dissipation in Stochastic Contests

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  • Marco Faravelli
  • Luca Stanca

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Abstract

This paper shows how to maximize revenue when a contest is noisy. We consider a case where two or more contestants bid for a prize in a stochastic contest with proportional probabilities, where all bidders value the prize equally. We show that by fixing the number of tickets, thus setting a limit to total expenditures, it is possible to maximize the auctioneer's revenue and obtain (almost) full rent dissipation. We test this hypothesis with a laboratory experiment. The results indicate that, as predicted, revenue is significantly higher in a lottery with rationing than in a standard lottery. On the other hand, an alternative rationing mechanism that does not limit total expenditures fails to increase revenue relative to a standard lottery.

Suggested Citation

  • Marco Faravelli & Luca Stanca, 2010. "When Less is More: Rationing and Rent Dissipation in Stochastic Contests," Working Papers 197, University of Milano-Bicocca, Department of Economics, revised Sep 2010.
  • Handle: RePEc:mib:wpaper:197
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    Cited by:

    1. Bayer, Ralph-Christopher, 2016. "Cooperation and distributive conflict," Games and Economic Behavior, Elsevier, vol. 97(C), pages 88-109.
    2. Roman M. Sheremeta, 2013. "Overbidding And Heterogeneous Behavior In Contest Experiments," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 491-514, July.
    3. Fallucchi, Francesco & Renner, Elke & Sefton, Martin, 2013. "Information feedback and contest structure in rent-seeking games," European Economic Review, Elsevier, pages 223-240.
    4. Ian A. MacKenzie & Markus Ohndorf, 2016. "Caps on Coasean transfers," Oxford Economic Papers, Oxford University Press, vol. 68(2), pages 566-584.
    5. Subhasish M. Chowdhury & Anwesha Mukherjee & Theodore L. Turocy, 2016. "That's the ticket: Explicit lottery randomisation and learning in Tullock contests," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 16-07, School of Economics, University of East Anglia, Norwich, UK..
    6. Liu, Xuyuan & Lu, Jingfeng, 2017. "Optimal prize-rationing strategy in all-pay contests with incomplete information," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 57-90.
    7. Chen, Hong & Feng, Qun & Cao, Jing, 2014. "Rent-seeking mechanism for safety supervision in the Chinese coal industry based on a tripartite game model," Energy Policy, Elsevier, vol. 72(C), pages 140-145.
    8. Sara Godoy & Miguel Meléndez-Jiménez & Antonio Morales, 2015. "No fight, no loss: underinvestment in experimental contest games," Economics of Governance, Springer, vol. 16(1), pages 53-72, February.

    More about this item

    Keywords

    Stochastic Contests; Rent Seeking; Laboratory Experiments;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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