Equity and Effectiveness of Optimal Taxation in Contests Under an All-Pay Auction
Netanya Academic College
Bar-Ilan University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)
January 26, 2012
CESifo Working Paper Series No. 3712
The means of contest design may include differential taxation of the prize. This paper establishes that, given a revenue-maximizing contest designer who faces a balanced-budget constraint, the optimal taxation scheme corresponding to an all-pay auction is appealing in two senses. First, it ensures exceptional equitable final prize valuations. Second, it is effective; it yields total contestants’ efforts that are larger than those obtained under almost any Tullock-type lottery. Furthermore, when a budget surplus is allowed, the superiority of optimal taxation under the APA is preserved in terms of equity and effectiveness relative to optimal taxation under any contest success function.
Number of Pages in PDF File: 34
Keywords: contest design, revenue maximization, balanced-budget constraint, budget surplus, optimal differential taxation, endogenous stakes, all-pay auction, lottery
JEL Classification: D700, D720, D740, D780
Date posted: January 26, 2012
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