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When less is more: Rationing and rent dissipation in stochastic contests

Marco Faravelli and Luca Stanca ()

Games and Economic Behavior, 2012, vol. 74, issue 1, 170-183

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 where all bidders value the prize equally. We show that, whenever a Tullock contest yields under-dissipation, the auctioneerʼs revenue can be increased by optimally fixing the number of tickets. In particular, in a stochastic contest with proportional probabilities, it is possible to 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)
Date: 2012
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Working Paper: When Less is More: Rationing and Rent Dissipation in Stochastic Contests (2010) Downloads
Working Paper: When Less is More: Rationing and Rent Dissipation in Stochastic Contests (2010) Downloads
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