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The lowest-bid all-pay-auction as a fund-raising mechanism: Theoretically optimal but behaviorally fragile

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  • Damianov Damian S.
  • Peeters Ronald

    (METEOR)

Abstract

We study the optimal design of mechanisms for the private provision of public goods in a simplesetting in which donors compete for a prize of commonly known value. The optimal mechanism in thismodel is the lowest-price all-pay auction – a mechanism in which the highest bidder wins but allbidders pay the lowest bid. The highest amount for the public good is generated in the unique,symmetric, mixed-strategy equilibrium of this mechanism. We derive the equilibrium distributionfunction in a closed form for any number of bidders. We then compare various all-pay auctions andlotteries in lieu of voluntary contributions with a battery of laboratory experiments. Theperformance of the optimal mechanism depends on the level of competition. The lowest-price all-payauction dominates the remaining auction formats with three competing bidders, but is inferior tothe own-pay auction and the lottery with only two bidders.

Suggested Citation

  • Damianov Damian S. & Peeters Ronald, 2012. "The lowest-bid all-pay-auction as a fund-raising mechanism: Theoretically optimal but behaviorally fragile," Research Memorandum 051, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  • Handle: RePEc:unm:umamet:2012051
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    References listed on IDEAS

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    1. Carpenter, Jeffrey & Holmes, Jessica & Matthews, Peter Hans, 2010. "Endogenous participation in charity auctions," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 921-935, December.
    2. Dan Kovenock & Michael R. Baye & Casper G. de Vries, 1996. "The all-pay auction with complete information (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 291-305.
    3. Bagnoli, Mark & McKee, Michael, 1991. "Voluntary Contribution Games: Efficient Private Provision of Public Goods," Economic Inquiry, Western Economic Association International, vol. 29(2), pages 351-366, April.
    4. Mark Bagnoli & Barton L. Lipman, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," Review of Economic Studies, Oxford University Press, vol. 56(4), pages 583-601.
    5. Che, Yeon-Koo & Gale, Ian L, 1998. "Caps on Political Lobbying," American Economic Review, American Economic Association, vol. 88(3), pages 643-651, June.
    6. Blume, Andreas & Heidhues, Paul, 2004. "All equilibria of the Vickrey auction," Journal of Economic Theory, Elsevier, vol. 114(1), pages 170-177, January.
    7. Bos, Olivier, 2011. "How lotteries outperform auctions," Economics Letters, Elsevier, vol. 110(3), pages 262-264, March.
    8. Jeffrey Carpenter & Jessica Holmes & PeterHans Matthews, 2008. "Charity auctions: a field experiment," Economic Journal, Royal Economic Society, vol. 118(525), pages 92-113, January.
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    Cited by:

    1. Bos, Olivier, 2016. "Charity auctions for the happy few," Mathematical Social Sciences, Elsevier, vol. 79(C), pages 83-92.
    2. Bos, Olivier, 2016. "Charity auctions for the happy few," Mathematical Social Sciences, Elsevier, vol. 79(C), pages 83-92.
    3. Damianov, Damian S., 2015. "Should lotteries offer discounts on multiple tickets?," Economics Letters, Elsevier, vol. 126(C), pages 84-86.

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