How (Not) to Raise Money

Posted: 10 Aug 2005

See all articles by Jacob K. Goeree

Jacob K. Goeree

University of Zurich

Emiel Maasland

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Sander Onderstal

University of Amsterdam; Tinbergen Institute

John L. Turner

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Abstract

We show that standard winner-pay auctions are inept fund-raising mechanisms because of the positive externality bidders forgo if they top another's high bid. Revenues are suppressed as a result and remain finite even when bidders value a dollar donated the same as a dollar kept. This problem does not occur in lotteries and all-pay auctions, where bidders pay irrespective of whether they win. We introduce a general class of all-pay auctions, rank their revenues, and illustrate how they dominate lotteries and winner-pay formats. The optimal fund-raising mechanism is an all-pay auction augmented with an entry fee and reserve price.

Suggested Citation

Goeree, Jacob K. and Maasland, Emiel and Onderstal, Sander and Turner, John L., How (Not) to Raise Money. Journal of Political Economy, Vol. 113, pp. 897-918, August 2005 , Available at SSRN: https://ssrn.com/abstract=772083

Jacob K. Goeree (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/jgoeree.html

Emiel Maasland

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 408 1513 (Phone)

Sander Onderstal

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

John L. Turner

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Athens, GA 30602-6254
United States

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