When Less is More: Rationing and Rent Dissipation in Stochastic Contests

Marco Faravelli and Luca Stanca

No 197, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: This paper shows how to maximize revenue when a contest is noisy. We consider a case where two or more contestants bid for a prize in a stochastic contest with proportional probabilities, where all bidders value the prize equally. We show that by fixing the number of tickets, thus setting a limit to total expenditures, it is possible to maximize the auctioneer's revenue and obtain (almost) full rent dissipation. We test this hypothesis with a laboratory experiment. The results indicate that, as predicted, revenue is significantly higher in a lottery with rationing than in a standard lottery. On the other hand, an alternative rationing mechanism that does not limit total expenditures fails to increase revenue relative to a standard lottery.

Keywords: Stochastic Contests; Rent Seeking; Laboratory Experiments (search for similar items in EconPapers)
JEL-codes: C91 D44 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2010-09, Revised 2010-09
New Economics Papers: this item is included in nep-cbe and nep-exp
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http://repec.dems.unimib.it/repec/pdf/mibwpaper197.pdf First version, 2010 (application/pdf)

Related works:
Journal Article: When less is more: Rationing and rent dissipation in stochastic contests (2012)
Working Paper: When Less is More: Rationing and Rent Dissipation in Stochastic Contests (2010)
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