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Equity and Effectiveness of Optimal Taxation in Contests Under an All-Pay Auction

34 Pages Posted: 26 Jan 2012  

Yosef Mealem

Netanya Academic College

Shmuel Nitzan

Bar-Ilan University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 26, 2012

Abstract

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.

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

Suggested Citation

Mealem, Yosef and Nitzan, Shmuel, Equity and Effectiveness of Optimal Taxation in Contests Under an All-Pay Auction (January 26, 2012). CESifo Working Paper Series No. 3712. Available at SSRN: https://ssrn.com/abstract=1992334

Yosef Mealem

Netanya Academic College

1 University St
Netanya 42100, 4223587
Israel

Shmuel Nitzan (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
+972.3.531.8930 (Phone)
+972.3.535.3180 (Fax)

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