Optimal Contest Design: Tuning the Heat

61 Pages Posted: 16 Jun 2020 Last revised: 27 May 2022

See all articles by Igor Letina

Igor Letina

University of Bern - Department of Economics

Shuo Liu

Peking University - Guanghua School of Management

Nick Netzer

University of Zurich

Date Written: June 2020

Abstract

We consider the design of contests when the principal can choose both the prize profile and how the prizes are allocated as a function of a possibly noisy signal about the agents' efforts. We provide sufficient conditions that guarantee optimality of a contest. Optimal contests have a minimally competitive prize profile and an intermediate degree of competitiveness in the contest success function. Whenever observation is not too noisy, the optimum can be achieved by an all-pay auction with a cap. When observation is perfect, the optimum can also be achieved by a nested Tullock contest. We relate our results to a recent literature which has asked similar questions but has typically focused on the design of either the prize profile or the contest success function.

Keywords: contest design, optimal contests, tournaments

JEL Classification: D02, D82, M52

Suggested Citation

Letina, Igor and Liu, Shuo and Netzer, Nick, Optimal Contest Design: Tuning the Heat (June 2020). CEPR Discussion Paper No. DP14854, Available at SSRN: https://ssrn.com/abstract=3628174

Igor Letina (Contact Author)

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

Shuo Liu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Nick Netzer

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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