Optimal favoritism and maximal revenue: A generalized result

Chen Cohen, Roy Darioshi, Shmuel Nitzan

Research output: Contribution to journalArticlepeer-review

Abstract

A contest designer who maximizes revenue can secure almost the highest valuation of the contested prize. So far, under complete information, this has been shown assuming that the contest is based on a specific contest success function (CSF) and the designer resorts to two specific instruments of favoritism. This paper generalizes these results by establishing them for any regular CSF augmented with a differential taxation mechanism allowing the equilibrium conditions to exist. In contrast to the conclusions derived thus far, in our general setting, the maximal revenue can be achieved not only at corner but also at interior equilibria with full participation. Our study brings to a closure the longstanding effort to clarify the maximum attainable revenue and how it can be achieved within a very general framework. It explains, in particular, that neither an all-pay-auction (APA) nor any other particular CSF is superior for generating revenue based on favoritism and that a tradeoff between revenue and the extent of participation is avoidable.

Original languageEnglish
Article number102138
JournalEuropean Journal of Political Economy
Volume73
DOIs
StatePublished - 1 Jun 2022

Keywords

  • Corner and interior equilibria
  • Differential taxation
  • Optimal contest design
  • Revenue maximization

ASJC Scopus subject areas

  • Economics and Econometrics
  • Political Science and International Relations

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