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Optimal Contest Design: Tuning the Heat

Shuo Liu and Nick Netzer

No 14854, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We consider the design of contests when the principal can choose both the prize profile and how the prizes are allocated as a function of a possibly noisy signal about the agents’ efforts. We provide sufficient conditions that guarantee optimality of a contest. Optimal contests have a minimally competitive prize profile and an intermediate degree of competitiveness in the contest success function. Whenever observation is not too noisy, the optimum can be achieved by an all-pay auction with a cap. When observation is perfect, the optimum can also be achieved by a nested Tullock contest. We relate our results to a recent literature which has asked similar questions but has typically focused on the design of either the prize profile or the contest success function.

Keywords: Contest design; Optimal contests; Tournaments (search for similar items in EconPapers)
JEL-codes: D02 D82 M52 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-des and nep-mic
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