Prize and Punishment: Optimal Contest Design with Incomplete Information∗
نویسندگان
چکیده
This paper studies the optimal contest design problem when the abilities of the risk neutral contestants are independent private information. The contest designer has a fixed prize budget to elicit efforts from the contestants. We consider all possible mechanisms that allocate prizes and punishments (negative prizes) across the contestants. We find that an optimal contest mechanism does not exist. Nevertheless, the utmost total efforts (i.e. highest efforts inducible when all contestants are of the highest possible ability) can almost be achieved by mechanisms involving exploding punishments. When there is a bound on the punishment (i.e. K), an optimal contest mechanism exists and can be implemented by a modified all-pay auction with a minimum bid and a single prize consisting of the entire prize budget augmented by an entry fee of K from each participant; when no one bids, all participants share a nonnegative prize equally. JEL Classification Numbers: D72, D82, C73
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