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Optimal Reimbursement Schemes in Contests

Author

Listed:
  • Subhasish M. Chowdhury

    (School of Economics, University of Sheffield, Sheffield S10 2TU, UK)

  • Chen Cohen

    (Department of Public Policy and Management, Ben-Gurion University of the Negev, Beer-Sheva 84105, Israel)

  • Roy Darioshi

    (Department of Public Policy and Management, Ben-Gurion University of the Negev, Beer-Sheva 84105, Israel)

  • Shmuel Nitzan

    (Department of Economics, Bar-Ilan University, Ramat Gan, Israel)

Abstract

Many contests, such as innovation races or sport competitions, often involve reimbursement of expenses. This study examines optimal reimbursement schemes in two-player Tullock contests, analyzing six reimbursement structures: external versus internal funding source each targeting the contest winner, the loser, or both of them. We assess the implications on effort, winning probabilities, and designer payoff under three key conditions: full-reimbursement, neutrality (preserving initial win chances) and viability (positive efforts from players). We find that all the schemes can satisfy viability; and all the schemes except for external reimbursement to the winner can satisfy neutrality. Additionally, all the schemes except internal reimbursement to the winner, and internal or external reimbursement to both players can satisfy full-reimbursement. These findings indicate that optimal reimbursement structures and rates vary depending on the contest structure, and the designer’s objectives, such as maximizing effort or maximizing personal payoff.

Suggested Citation

  • Subhasish M. Chowdhury & Chen Cohen & Roy Darioshi & Shmuel Nitzan, 2025. "Optimal Reimbursement Schemes in Contests," Working Papers 2025007, The University of Sheffield, Department of Economics.
  • Handle: RePEc:shf:wpaper:2025007
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    File URL: https://www.sheffield.ac.uk/economics/research/serps
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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