Winner-Take-All and Proportional-Prize Contests: Theory and Experimental Results
Roman M. Sheremeta
Case Western Reserve University; Case Western Reserve University
William A. Masters
Tufts University - Friedman School of Nutrition Science and Policy; Tufts University - Department of Economics
Timothy N. Cason
Purdue University - Krannert School of Management
October 25, 2013
This study provides a unified framework to compare three canonical forms of competition: winner-take-all contests won by the best performer, winner-take-all lotteries where probability of success is proportional to performance, and proportional-prize contests in which rewards are shared in proportion to performance. Performance is affected by random noise, reflecting imperfect information. We derive equilibria and observe outcomes from each contest in a laboratory experiment. Equilibrium and observed efforts are highest in winner-take-all contests. Lotteries and proportional-prize contests have the same Nash equilibrium, but empirically, lotteries induce contestants to choose higher efforts and receive lower, more unequal payoffs. This result may explain why contest designers who seek only to elicit effort offer lump-sum prizes, even though contestants would be better off with proportional rewards. Finally, we collect measures of contestants’ risk aversion, other-regarding preferences, and utility of winning a contest, and use them to partially explain deviations from standard and homogeneous equilibrium models of effort choice in the three contests.
Number of Pages in PDF File: 41
Keywords: contests, rent-seeking, lotteries, incentives in experiments, risk aversion
JEL Classification: C72, D72, D74, J33
Date posted: March 4, 2012 ; Last revised: October 26, 2013
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