Lottery versus all-pay auction contests:A revenue dominance theorem


Franke, J., Kanzow, C., Leininger, W. and Schwartz, A., 2014. Lottery versus all-pay auction contests:A revenue dominance theorem. Games and Economic Behavior, 83, pp. 116-126.

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We allow a contest organizer to bias a contest in a discriminatory way; i.e., she can favor specific contestants by designing the contest rule in order to maximize total equilibrium effort (resp. revenue). The two predominant contest regimes are considered, all-pay auctions and lottery contests. For all-pay auctions the optimal bias is derived in closed form: It implies extreme competitive pressure among active contestants and low endogenous participation rates. Moreover, the exclusion principle advanced by Baye et al. (1993) becomes obsolete in this case. In contrast, the optimally biased lottery induces a higher number of actively participating contestants due to softer competition. Our main result regarding total revenue comparison under the optimal biases reveals that the all-pay auction revenue-dominates the lottery contest for all levels of heterogeneity among contestants. The incentive effect due to a strongly discriminating contest rule (all-pay auction) dominates the participation effect due to a weakly discriminating contest rule (lottery). © 2013.


Item Type Articles
CreatorsFranke, J., Kanzow, C., Leininger, W. and Schwartz, A.
Related URLs
Uncontrolled Keywordsall-pay auction,exclusion principle,lottery contest,optimal bias,revenue,finance,economics and econometrics
DepartmentsFaculty of Humanities & Social Sciences > Economics
ID Code58049


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