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Optimal favoritism in all-pay auctions and lottery contests

Author

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  • Franke, Jörg
  • Leininger, Wolfgang
  • Wasser, Cédric

Abstract

We analyze the revenue-enhancing potential of favoring specific contestants in complete-information all-pay auctions and lottery contests with several heterogeneous contestants. Two instruments of favoritism are considered: head starts that are added to the bids of specific contestants and multiplicative biases that give idiosyncratic weights to the bids. In the all-pay auction, head starts are more effective than biases while optimally combining both instruments even yields first-best revenue. In the lottery contest, head starts are less effective than biases and combining both instruments cannot further increase revenue. As all-pay auctions revenue-dominate lottery contests under optimal biases, we thus obtain an unambiguous revenue-ranking of all six combinations of contest formats and instruments.

Suggested Citation

  • Franke, Jörg & Leininger, Wolfgang & Wasser, Cédric, 2018. "Optimal favoritism in all-pay auctions and lottery contests," European Economic Review, Elsevier, vol. 104(C), pages 22-37.
    • Handle: RePEc:eee:eecrev:v:104:y:2018:i:c:p:22-37
    DOI: 10.1016/j.euroecorev.2018.02.001
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    More about this item

    Keywords

    All-pay auction; Lottery contest; Favoritism; Head start; Revenue dominance;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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