22 Pages Posted: 5 May 2021
Date Written: May 1, 2021
In this paper, we ask a fundamental design question in the theory of contests: Should contestants and reward money be pooled into a single grand contest, or should they be divided into parallel subcontests? We theoretically explore optimal divisioning using Tullock’s lottery contest framework and compare the performance, i.e., total effort generated, of the grand contest to the performance of contest divisioning based on players' ability or risk attitude. When all players are risk neutral, contest divisioning is never optimal. However, given that players are heterogeneous in either ability or risk attitude, we find that contest divisioning is optimal when the degrees of absolute risk aversion are sufficiently large. Importantly, our results support the widespread use of divisioning seen in practice.
Keywords: contest design, divisioning, cost heterogeneity, risk attitude heterogeneity
JEL Classification: C72, D72, D81
Suggested Citation: Suggested Citation