Optimal Favoritism in All-Pay Auctions and Lottery Contests
33 Pages Posted: 6 Feb 2017
Date Written: December 2016
We analyze the revenue-enhancing potential of favoring specific contestants in complete information all-pay auctions and lottery contests with several heterogeneous contestants. Two instruments of favoritism are considered: head starts that are added to the bids of specific contestants and multiplicative biases that give idiosyncratic weights to the bids. In the all-pay auction, head starts are more effective than biases while optimally combining both instruments even yields first-best revenue. In the lottery contest, head starts are less effective than biases and combining both instruments cannot further increase revenue. As all-pay auctions revenue-dominate lottery contests under optimal biases, we thus obtain an unambiguous revenue-ranking of all six combinations of contest formats and instruments.
Keywords: all-pay auction, lottery contest, favoritism, head start, revenue dominance
JEL Classification: C720, D720
Suggested Citation: Suggested Citation