When Less is More: Rationing and Rent Dissipation in Stochastic Contests
26 Pages Posted: 30 May 2011 Last revised: 21 May 2013
Date Written: September 8, 2010
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: Suggested Citation