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Lottery versus All-Pay Auction Contests – A Revenue Dominance Theorem

  • Jörg Franke

    ()

  • Christian Kanzow
  • Wolfgang Leininger
  • Alexandra Schwartz

We allow a contest organizer to bias a contest in a discriminatory way, that is, she can favor specific contestants through the choice of contest success functions in order to maximize total equilibrium effort (resp. revenue). The scope for revenue enhancement through biasing is analyzed and compared for the two predominant contest regimes; i.e. all-pay auctions and lottery contests. Our main result reveals that an appropriately biased all-pay auction revenue dominates the optimally biased lottery contest for all levels of heterogeneity among contestants. Moreover, such a biased all-pay auction will never make use of the celebrated exclusion principle advanced by Baye et al. (1993).

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0315.

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Length: 19 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:rwi:repape:0315
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  1. Baye, Michael R & Kovenock, Dan & de Vries, Casper G, 1993. "Rigging the Lobbying Process: An Application of the All-Pay Auction," American Economic Review, American Economic Association, vol. 83(1), pages 289-94, March.
  2. Baye, M.R. & Kovenock, D. & De Vries, C., 1992. "The All-Pay Auction with Complete Information," Papers 8-92-1, Pennsylvania State - Department of Economics.
  3. Arye L. Hillman & John G. Riley, 1987. "Politically Contestable Rents and Transfers," UCLA Economics Working Papers 452, UCLA Department of Economics.
  4. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June.
  5. Yeon-Koo Che & Ian Gale, 2000. "Optimal Design of Research Contests," Econometric Society World Congress 2000 Contributed Papers 1784, Econometric Society.
  6. Ron Siegel, 2010. "Asymmetric Contests with Conditional Investments," American Economic Review, American Economic Association, vol. 100(5), pages 2230-60, December.
  7. Epstein, Gil S. & Mealem, Yosef & Nitzan, Shmuel, 2012. "Lotteries vs. All-Pay Auctions in Fair and Biased Contests," IZA Discussion Papers 7032, Institute for the Study of Labor (IZA).
  8. Rene Kirkegaard, 2008. "Favoritism in Contests: Head Starts and Handicaps," Working Papers 0805, Brock University, Department of Economics, revised Nov 2008.
  9. Richard Cornes & Roger Hartley, 2005. "Asymmetric contests with general technologies," Economic Theory, Springer, vol. 26(4), pages 923-946, November.
  10. Qiang Fu, 2006. "A Theory of Affirmative Action in College Admissions," Economic Inquiry, Western Economic Association International, vol. 44(3), pages 420-428, July.
  11. Gil S. Epstein & Yosef Mealem & Shmuel Nitzan, 2010. "Political Culture and Discrimination in Contests," CESifo Working Paper Series 3170, CESifo Group Munich.
  12. Qiang Fu & Jingfeng Lu, 2010. "Contest Design And Optimal Endogenous Entry," Economic Inquiry, Western Economic Association International, vol. 48(1), pages 80-88, 01.
  13. Ian Gale & Mark Stegeman, 1994. "Exclusion in all-pay auctions," Working Paper 9401, Federal Reserve Bank of Cleveland.
  14. Fang, Hanming, 2002. " Lottery versus All-Pay Auction Models of Lobbying," Public Choice, Springer, vol. 112(3-4), pages 351-71, September.
  15. Franke, Jörg, 2012. "Affirmative action in contest games," European Journal of Political Economy, Elsevier, vol. 28(1), pages 105-118.
  16. Stein, William E, 2002. " Asymmetric Rent-Seeking with More Than Two Contestants," Public Choice, Springer, vol. 113(3-4), pages 325-36, December.
  17. Jörg Franke & Christian Kanzow & Wolfgang Leininger & Alexandra Schwartz, 2013. "Effort maximization in asymmetric contest games with heterogeneous contestants," Economic Theory, Springer, vol. 52(2), pages 589-630, March.
  18. Konrad, Kai A., 2009. "Strategy and Dynamics in Contests," OUP Catalogue, Oxford University Press, number 9780199549603, March.
  19. Kirkegaard, René, 2012. "Favoritism in asymmetric contests: Head starts and handicaps," Games and Economic Behavior, Elsevier, vol. 76(1), pages 226-248.
  20. Alcalde, José & Dahm, Matthias, 2010. "Rent seeking and rent dissipation: A neutrality result," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 1-7, February.
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