Optimal Reimbursement Schemes in Contests

Doron Sayag (), Subhasish M. Chowdhury (), Chen Cohen (), Roy Darioshi () and Shmuel Nitzan ()
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Doron Sayag: Department of Economics Bar-Ilan University
Subhasish M. Chowdhury: Department of Economics, University of Sheffield
Chen Cohen: Department of Public Policy and Management, Ben-Gurion University of the Negev
Roy Darioshi: Department of Public Policy and Management, Ben-Gurion University of the Negev
Shmuel Nitzan: Department of Economics, Bar-Ilan University

No 2024-08, Working Papers from Bar-Ilan University, Department of Economics

Abstract: Many contests, such as innovation races or litigation, often involve reimbursement of expenses. This study examines optimal reimbursement schemes in two-player Tullock contests, analyzing four reimbursement structures: external and internal mechanisms targeting the contest winner or loser. We assess the implications on participant effort, winning probabilities, and designer payoff, under two key conditions: fairness (preserving initial win chances) and viability (positive efforts from players). We find that while external reimbursement for the loser ensures both fairness and viability, full reimbursement to the winner fails to meet these criteria. Additionally, the findings indicate that optimal reimbursement structures and proportions vary depending on the contest designer’s objectives, such as maximizing effort or personal payoff.

Keywords: contest; reimbursement scheme; R&D; Tullock (search for similar items in EconPapers)
JEL-codes: I26 J24 O14 O4 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2024-11
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