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Winner-Take-All and Proportional-Prize Contests: Theory and Experimental ResultsRoman M. SheremetaChapman University William A. MastersTufts University - Friedman School of Nutrition - Department of Food and Nutrition Policy Timothy N. CasonPurdue University - Krannert School of Management May 9, 2012 Abstract: 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.
Number of Pages in PDF File: 39 Keywords: contests, rent-seeking, lotteries, incentives in experiments, risk aversion JEL Classification: C72, D72, D74, J33 working papers seriesDate posted: March 4, 2012 ; Last revised: May 10, 2012Suggested CitationContact Information
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