When Less is More: Rationing and Rent Dissipation in Stochastic Contests

26 Pages Posted: 30 May 2011 Last revised: 21 May 2013

See all articles by Luca Stanca

Luca Stanca

University of Milan, Bicocca - Department of Economics; Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS); Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Marco Faravelli

The University of Queensland

Date Written: September 8, 2010

Abstract

This paper shows how to maximize revenue when a contest is noisy. We consider a case where two or more contestants bid for a prize in a stochastic contest with proportional probabilities, where all bidders value the prize equally. We show that by fixing the number of tickets, thus setting a limit to total expenditures, it is possible to maximize the auctioneer’s revenue and obtain (almost) full rent dissipation. We test this hypothesis with a laboratory experiment. The results indicate that, as predicted, revenue is significantly higher in a lottery with rationing than in a standard lottery. On the other hand, an alternative rationing mechanism that does not limit total expenditures fails to increase revenue relative to a standard lottery.

Keywords: stochastic contests, rent seeking, laboratory experiments

JEL Classification: C91, D44

Suggested Citation

Stanca, Luca and Faravelli, Marco, When Less is More: Rationing and Rent Dissipation in Stochastic Contests (September 8, 2010). CISEPS Research Paper No. 2/2011. Available at SSRN: https://ssrn.com/abstract=1851283 or http://dx.doi.org/10.2139/ssrn.1851283

Luca Stanca (Contact Author)

University of Milan, Bicocca - Department of Economics ( email )

Piazza dell'Ateneo, Nuovo I
Milan 20126
Italy

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Marco Faravelli

The University of Queensland ( email )

Australia

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