IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Optimal Dynamic Contests

Listed author(s):
  • Lones Smith

    (University of Michigan, Department of Economics)

  • Giuseppe Moscarini

    (Yale University, Department of Economics)

We study the design of optimal incentives in a two-player dynamic contest. Two players continuously spend costly effort to attain a score lead, which is also affected by noise. The first player to reach a predetermined score difference (finish line) wins a prize. We focus on the choice of the optimal prize for the winner and on the optimal scoring rule, which penalizes or boosts the leader at each point in the game. We solve for a Symmetric Markov Perfect Equilibrium of the contest, and use it to evaluate a few possible principal's objectives. We find that equilibrium effort is always positive, increasing or hump-shaped in own lead, and the leader always exerts more effort than the follower. These results replicate in our continuous time, continuous state space setting those obtained by Harris and Vickers (1987) in a different discrete time, discrete state model. Our model is more tractable and affords our main innovation, the normative analysis of this game. Due to the strategic interaction, the optimal prize that maximizes expected total agents' output is finite even if effort costs and the value of the prize are of no concern to the principal. Too large a prize and the strategic complementarities of agents' efforts generate an initial war phase, followed by low effort thereafter and whenever the lead is not very small. We conjecture that the optimal scoring rule entails penalizing the leader to keep the laggard from giving up, despite the adverse ex ante incentives of this rule. We show how to solve numerically for the optimal scoring rule.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 249.

in new window

Date of creation: 2007
Handle: RePEc:red:sed007:249
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed007:249. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.