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Lottery versus All-Pay Auction Contests: A Revenue Dominance Theorem

Jörg Franke, Christian Kanzow, Wolfgang Leininger and Alexandra Schwartz

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: We allow a contest organizer to bias a contest in a discriminatory way; i.e., she can favor specific contestants by designing the contest rule in order to maximize total equilibrium effort (resp. revenue). The two predominant contest regimes are considered, all-pay auctions and lottery contests. For all-pay auctions the optimal bias is derived in closed form: It implies extreme competitive pressure among active contestants and low endogenous entry. Moreover, the exclusion principle advanced by Baye et al. (1993) becomes obsolete in this case. In contrast, the optimally biased lottery induces larger entry of contestants due to softer competition. Our main result regarding total revenue comparison under the optimal biases reveals that the all-pay auction revenue dominates the lottery contest for all levels of heterogeneity among contestants. The incentive effect due to a strongly discriminating contest rule (all-pay auction) dominates the participation effect due to a weakly discriminating contest rule (lottery).

JEL-codes: C62 C72 D72 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-gth and nep-mic
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https://www.econstor.eu/bitstream/10419/79998/1/VfS_2013_pid_290.pdf (application/pdf)

Related works:
Journal Article: Lottery versus all-pay auction contests: A revenue dominance theorem (2014) Downloads
Working Paper: Lottery versus All-Pay Auction Contests: A Revenue Dominance Theorem (2014)
Working Paper: Lottery versus All-Pay Auction Contests – A Revenue Dominance Theorem (2012) Downloads
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