When less is more: Rationing and rent dissipation in stochastic contests |
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Authors: | Marco Faravelli Luca Stanca |
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Affiliation: | a School of Economics, University of Queensland, Australia b Department of Economics, University of Milan Bicocca, Italy |
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Abstract: | This paper shows how to maximize revenue when a contest is noisy. We consider a case where two or more contestants bid for a prize in a stochastic contest where all bidders value the prize equally. We show that, whenever a Tullock contest yields under-dissipation, the auctioneer?s revenue can be increased by optimally fixing the number of tickets. In particular, in a stochastic contest with proportional probabilities, it is possible to obtain (almost) full rent dissipation. We test this hypothesis with a laboratory experiment. The results indicate that, as predicted, revenue is significantly higher in a lottery with rationing than in a standard lottery. On the other hand, an alternative rationing mechanism that does not limit total expenditures fails to increase revenue relative to a standard lottery. |
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Keywords: | C91 D44 |
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