Working Paper: CEPR ID: DP11113
Authors: Aner Sela
Abstract: We study two-stage all-pay contests where there is synergy between the stages. The reward for each contestant is fixed in the first stage while it is effort-dependent in the second one. We assume that a player's effort in the first stage either increases (positive synergy) or decreases (negative synergy) his reward in the second stage. The subgame perfect equilibrium of this contest is analyzed with either positive or negative synergy. We show, in particular, that whether the contestants are symmetric or asymmetric their expected payoffs may be higher under negative synergy than under positive synergy. Consequently, they prefer smaller rewards (negative synergy) over higher ones (positive synergy).
Keywords: effort-dependent rewards; two-stage all-pay contests
JEL Codes: C70; D44; L12; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nature of synergy (positive or negative) (L14) | Contestants' outcomes (C52) |
| Contestants prefer lower rewards (negative synergy) (C72) | Higher rewards (positive synergy) (C73) |
| Asymmetric contests (stronger contestant) (C72) | Positive expected payoff (D81) |
| Marginal rates of increase or decrease in rewards (J33) | Preference shift of stronger contestant (D79) |
| Contestants' efforts in the first stage (Y20) | Rewards in the second stage (C73) |