Multi-prize contests with risk-averse players

Qiang Fu, Xiruo Wang and Zenan Wu

Games and Economic Behavior, 2021, vol. 129, issue C, 513-535

Abstract: This paper studies a multi-prize imperfectly discriminatory contest with symmetric risk-averse contestants. Adopting a multi-winner nested Tullock contest model, we first establish the existence and uniqueness of a symmetric pure-strategy equilibrium under plausible conditions. We then investigate the optimal prize allocation in the contest. Our analysis provides a formal account of the incentive effects triggered by a variation in the prevailing prize structure when contestants are risk averse. We demonstrate that contestants' incentive subtly depends not only on the degree of a contestant's risk aversion but also that of his prudence. The former affects the marginal benefit of effort, while the latter affects the marginal cost. We derive sufficient conditions under which a single-(multi-)prize contest would be optimal when the contest designer aims to maximize total effort. We also discuss in depth the roles played by risk aversion and prudence in optimal prize allocation.

Keywords: Risk aversion; Bidding equilibrium; Prize allocation; Multiple prizes; Contest design (search for similar items in EconPapers)
JEL-codes: C72 D72 D81 J31 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:129:y:2021:i:c:p:513-535

DOI: 10.1016/j.geb.2021.07.003

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