Bid Caps in Noisy Contests

Qiang Fu, Zenan Wu and Yuxuan Zhu

American Economic Journal: Microeconomics, 2023, vol. 15, issue 3, 426-73

Abstract: This paper studies optimal bid caps in a multiplayer noisy contest in which a higher bid does not guarantee a sure win. The bid cap can be either rigid or flexible. The former imposes outright bidding restrictions on players' bids, while the latter taxes bids. A designer structures the bid cap to maximize a weighted sum between aggregate bid and tax revenue. Our analysis characterizes the optimum. A rigid bid is always outperformed by flexible ones, and a laissez-faire policy—i.e., no cap—is optimal when the designer maximizes the aggregate bid. The results also generate novel practical implications.

JEL-codes: C72 D44 D82 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1257/mic.20220046

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