Stochastic-Share Contests

Abstract

This paper proposes the Stochastic-Share contest, a novel contest format that combines the Winner-Take-All and Proportional-Prize formats, 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 the excitement of the Winner-Take-All format and the security of the Proportional-Prize setting. When we test this theoretical result with duopoly contest experiments, we find evidence that Stochastic-Share contests can generate greater aggregate investment than either Winner-Take-All or Proportional-Prize contests.

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

JEL Classification: C72, D72, C90, D82