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

Jorg Franke, Christian Kanzow, Wolfgang Leininger, Alexandra Schwartz

Research output: Contribution to journalArticle

20 Citations (Scopus)

Abstract

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).

Original languageEnglish
Pages (from-to)116-126
Number of pages11
JournalGames and Economic Behavior
Volume83
Early online date27 Nov 2013
DOIs
Publication statusPublished - 1 Jan 2014

Keywords

  • All-pay auction
  • Exclusion principle
  • Lottery contest
  • Optimal bias
  • Revenue

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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