Optimal Contest Design: Tuning the Heat
58 Pages Posted: 20 Apr 2022
Date Written: April 8, 2022
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
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