Ruhr Economic Papers

Ruhr Economic Papers #315

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

by Jörg Franke, Christian Kanzow, Wolfgang Leininger and Alexandra Schwartz

TU Dortmund, 02/2012, 17 S./p., 8 Euro, ISBN 978-3-86788-361-0 DOI: 10.4419/86788361

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Abstract

We allow a contest organizer to bias a contest in a discriminatory way, that is, she can favor specific contestants through the choice of contest success functions in order to maximize total equilibrium effort (resp. revenue). The scope for revenue enhancement through biasing is analyzed and compared for the two predominant contest regimes; i.e. all-pay auctions and lottery contests. Our main result reveals that an appropriately biased all-pay auction revenue dominates the optimally biased lottery contest for all levels of heterogeneity among contestants. Moreover, such a biased all-pay auction will never make use of the celebrated exclusion principle advanced by Baye et al. (1993).

JEL-Classification: C72, D72

Keywords: All-pay auction; lottery contest; bias; revenue

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