Optimal lottery |
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| Institution: | 1. London School of Economics, United Kingdom;2. Université d’Orléans, France;1. Sao Paulo School of Economics - FGV, Brazil;2. Michigan State University, Department of Economics, United States;1. MIA, Université La Rochelle, Avenue Michel Crépeau, 17042- La Rochelle, France;2. GREThA, Université de Bordeaux, Avenue Léon Duguit, 33608- Pessac Cedex, France;3. INRA-LAMETA, 2 Place Viala, 34060- Montpellier Cedex 1, France;1. Social Sciences Division, Yale-NUS College, 6 College Avenue East #07-19, Singapore 138614, Singapore;2. Department of Economics, Brown University, Providence, RI 02912, USA;1. School of Finance, Renmin University of China, China;2. Department of Economics, Chinese University of Hong Kong, Shatin, N.T., Hong Kong |
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| Abstract: | This article proposes an equilibrium approach to lottery markets in which a firm designs an optimal lottery to rank-dependent expected utility (RDU) consumers. We show that a finite number of prizes cannot be optimal, unless implausible utility and probability weighting functions are assumed. We then investigate the conditions under which a probability density function can be optimal. With standard RDU preferences, this implies a discrete probability on the ticket price, and a continuous probability on prizes afterwards. Under some preferences consistent with experimental literature, the optimal lottery follows a power-law distribution, with a plausibly extremely high degree of prize skewness. |
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| Keywords: | Decision-making under risk Lottery games Firm behavior |
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