Winner-Take-All and Proportional-Prize Contests: Theory and Experimental Results

41 Pages Posted: 4 Mar 2012 Last revised: 26 Oct 2013

Roman M. Sheremeta

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

Date Written: October 25, 2013

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. 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.

Keywords: contests, rent-seeking, lotteries, incentives in experiments, risk aversion

JEL Classification: C72, D72, D74, J33

Suggested Citation

Sheremeta, Roman M. and Masters, William A. and Cason, Timothy N., Winner-Take-All and Proportional-Prize Contests: Theory and Experimental Results (October 25, 2013). Available at SSRN: https://ssrn.com/abstract=2014994 or http://dx.doi.org/10.2139/ssrn.2014994

Roman M. Sheremeta (Contact Author)

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

William A. Masters

Tufts University - Friedman School of Nutrition Science and Policy ( email )

150 Harrison Avenue
Boston, MA 02111
United States

HOME PAGE: http://sites.tufts.edu/willmasters

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States

Timothy N. Cason

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
765-494-1737 (Phone)

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