Stochastic-Share Contests

Abstract

This paper proposes the Stochastic-Share Contest, a novel contest format that combines the Winner-Take-All Contest and the Proportional-Prize Contest, with the former nesting the latter two as special cases. Motivated by the experimental contest literature, we include risk aversion and a "joy of winning" in our model and show that Stochastic-Share Contests induce optimal investment when both are present. Intuitively, the Stochastic-Share format achieves this result by harnessing both the excitement of the Winner-Take-All format and the security of the Proportional-Prize setting. Among the many applications of Stochastic-Share Contests, we illustrate their utility for contest experiments, "winner-take-all markets," patent policy, design competitions, and employee reward programs.

Keywords: contest, winner-take-all, proportional-prize, risk aversion, joy of winning

JEL Classification: C72, D72, C90, D40, D82