Equity and effectiveness of optimal taxation in contests under an all-pay auction

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The means of contest design may include differential taxation of the prize. This paper establishes that, given a revenue-maximizing contest designer who faces a balanced-budget constraint, the optimal taxation scheme corresponding to an all-pay auction is appealing in two senses. First, it ensures exceptional equitable final prize valuations. Second, it is effective; it yields total contestants' efforts that are larger than those obtained under almost any Tullock-type lottery. Furthermore, when a budget surplus is allowed, the superiority of optimal taxation under the APA is preserved in terms of equity and effectiveness relative to optimal taxation under any contest success function. Terms of use: Documents in EconStor mayJEL-Code: D700, D720, D740, D780.

Heterogeneity, Leveling the Playing Field, and Affirmative Action in Contests

“…The first one combines the optimal multiplicative bias with the optimal level of noise: either r = 2 or r = ∞ Nitzan, 2011, 2013). The second one combines the optimal modification of valuations through an additive tax and the optimal level of noise: either r = 2 or r = ∞ (Mealem and Nitzan, 2014). conclude that total effort could reach v 1 by combining the optimal level of noise r = ∞ and an optimal combination of multiplicative and additive bias.…”

Direct and Structural Discrimination in Contests

“…Such a policy is usually based on a "give and take" mechanism in case of winning, which is henceforth referred to as direct discrimination. This form of discrimination has been recently introduced in Mealem and Nitzan (2013) and extensively discussed, focusing on its comparative application in an all-pay-auction relative to a logit CSF.…”

“…Such interest groups are typically represented by lobbyists who are the actual contestants. Mealem and Nitzan (2013) have shown that discrimination implemented by taxing and subsidizing the prize subject to a balanced budget constraint is also effective when applied independently.…”

“…That is, when the designer resorts solely to this mode of discrimination, he can increase the contestants' efforts. Note that Mealem and Nitzan (2013) focus on the application of direct discrimination disregarding structural discrimination. Their main purpose is to show that in this setting the all-pay-auction induces more efforts than any logit CSF with 2 0 < < α .…”

“…Our main result reinforces the preliminary result by establishing that the extreme, twofold discrimination strategies presented in the preliminary result can yield efforts that are arbitrarily close to the maximal efforts. Surprisingly, this result implies that if the designer can control the two modes of discrimination as well as the exponent α of the CSF in (1), he can secure the largest possible efforts that are almost equal to the initial higher prize valuation by selecting the widely studied simple logit CSF where 1 = α .2 F 3 The superiority of this constant-returns-to-scale-logit CSF is in marked contrast to its non-optimality when the designer is not allowed to 2 See Epstein et al (2013) and Mealem and Nitzan (2013). 3 In the designer's problem (10), the exponent α is a given parameter, 2 0 ≤ < α…”