Optimal prize allocation in contests: The role of negative prizes

Liu, B; Lu, J; Wang, R; Zhang, J

Optimal prize allocation in contests: The role of negative prizes

Liu, B Lu, J Wang, R Zhang, J

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Publication Type:: Journal Article
Citation:: Journal of Economic Theory, 2018, 175 pp. 291 - 317
Issue Date:: 2018-05-01

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Field	Value	Language
dc.contributor.author	Liu, B	en_US
dc.contributor.author	Lu, J	en_US
dc.contributor.author	Wang, R	en_US
dc.contributor.author	Zhang, J https://orcid.org/0000-0002-7528-3653	en_US
dc.date.issued	2018-05-01	en_US
dc.identifier.citation	Journal of Economic Theory, 2018, 175 pp. 291 - 317	en_US
dc.identifier.issn	0022-0531	en_US
dc.identifier.uri	http://hdl.handle.net/10453/130375
dc.description.abstract	© 2018 In this paper, we analyze the role of negative prizes in contest design with a fixed budget, risk-neutral contestants, and independent private abilities. The effort-maximizing prize allocation rule features a threshold. When the highest effort is above the threshold, all contestants with lower efforts receive negative prizes. These negative prizes are used to augment the prize to the contestant with the highest effort, which better incentivizes contestants with higher abilities. When no contestant's effort exceeds the threshold, all contestants equally split the initial budget (or a portion of it) to ensure their participation. We find that allowing negative prizes can increase the expected total effort dramatically. In particular, if no bound is imposed on negative prizes, the expected total effort can be arbitrarily close to the highest possible effort inducible when all contestants have the maximum ability with certainty. The above contest is shown to be the optimal mechanism for a more general class of mechanisms.	en_US
dc.relation.ispartof	Journal of Economic Theory	en_US
dc.relation.isbasedon	10.1016/j.jet.2018.01.016	en_US
dc.subject.classification	Economic Theory	en_US
dc.title	Optimal prize allocation in contests: The role of negative prizes	en_US
dc.type	Journal Article
utslib.citation.volume	175	en_US
utslib.for	1401 Economic Theory	en_US
utslib.for	1499 Other Economics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
utslib.copyright.status	closed_access
pubs.publication-status	Published	en_US
pubs.volume	175	en_US

Abstract:

© 2018 In this paper, we analyze the role of negative prizes in contest design with a fixed budget, risk-neutral contestants, and independent private abilities. The effort-maximizing prize allocation rule features a threshold. When the highest effort is above the threshold, all contestants with lower efforts receive negative prizes. These negative prizes are used to augment the prize to the contestant with the highest effort, which better incentivizes contestants with higher abilities. When no contestant's effort exceeds the threshold, all contestants equally split the initial budget (or a portion of it) to ensure their participation. We find that allowing negative prizes can increase the expected total effort dramatically. In particular, if no bound is imposed on negative prizes, the expected total effort can be arbitrarily close to the highest possible effort inducible when all contestants have the maximum ability with certainty. The above contest is shown to be the optimal mechanism for a more general class of mechanisms.

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http://hdl.handle.net/10453/130375