Working Paper: CEPR ID: DP14854
Authors: Igor Letina; Shuo Liu; Nick Netzer
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
JEL Codes: D02; D82; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| prize profile (D44) | agents' efforts (L85) |
| contest success functions (CSFs) (C52) | agents' efforts (L85) |
| contest design (D44) | agents' efforts (L85) |
| observational noise (C90) | contest outcomes (C52) |
| optimal contests (C72) | agents' efforts (L85) |
| contest structure (D44) | agents' strategic choices (L21) |