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PRIZE‐BASED MECHANISMS FOR FUND‐RAISING: THEORY AND EXPERIMENTS

Damian S. Damianov and Ronald Peeters ()

Economic Inquiry, 2018, vol. 56, issue 3, 1562-1584

Abstract: We study the optimal design of mechanisms for the private provision of public goods in a setting in which donors compete for a prize of commonly known value. We discuss equilibrium bidding in mechanisms that promote both conditional cooperation and competition (i.e., the lottery and the all‐pay auction with the lowest‐bid payment rule) and rank their fund‐raising performance vis‐à‐vis their standard (pay‐your‐own‐bid) counterparts. The theoretically optimal mechanism in this model is the lowest‐price all‐pay auction—an auction in which the highest bidder wins the prize and all bidders pay the lowest bid. The highest amount for the public good is generated in the unique, symmetric, mixed‐strategy equilibrium of this auction. In the laboratory, the theoretically optimal mechanism generates the highest level of donations with three bidders but not with two bidders. (JEL D44, D64)

Date: 2018
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