In a contest game, players exert costly effort in an attempt to win a prize. Each player can increase the chance of winning by making greater effort, but all efforts are sunk while only the winner gets the prize.
Assistant Professor Chang-Koo Chi
Chang-Koo Chi in Journal of Economic Theory
Assistant Professor Chang-Koo Chi´s paper «All-pay Auctions with Affiliated Binary Signals» is accepted for publication in Journal of Economic Theory.
Chang-Koo Chi is Assistant Professor at the Department of Economics and a researcher at the Centre for Business Economics, NHH.
Journal of Economic Theory, the leading journal in economic theory, is included in the NHH exclusive list of bonus journals. Researchers at NHH who publish in these journals receive a publication bonus of NOK 80 000.
Studies a contest
The study «All-pay Auctions with Affiliated Binary Signals» is a collaboration between Chi, Associate Professor Pauli Murto and Professor Juuso Välimäki, both Aalto University.
Chi explains:
'The paper studies a contest. Competition for a scarce resource in the real world often takes a form of contest. The leading example includes firms' R&D investments to develop a new product, lobbying activities to influence a politician's decision, and sport competitions to win a prize´, the NHH researcher says.
In a contest game, players exert costly effort in an attempt to win a prize. Each player can increase the chance of winning by making greater effort, but all efforts are sunk while only the winner gets the prize. Because of this feature, the game is referred to as an "all-pay" contest or auction in literature.
Lobbying example
`To illustrate the main idea of this paper, let's take a lobbying example. Suppose that several lobbyists attempt to make contributions for a candidate's campaigns, expecting to win a political prize in the future. The candidate, after her election, awards the prize to one of them who made the most contributions. However, the value of the prize depends on whether the candidate is elected, and each lobbyist may have different estimates about the chance of being elected´, according to Chi.
In this lobbying game, Chi says, it is natural to think that the most optimistic lobbyist would contribute the most and thus take up the prize, as the lobbyist would value the prize the most'.
'However, Chi says, suppose that the lobbyists' estimates are positively correlated, meaning that if one lobbyist is optimistic, then other lobbyists are more likely to be so. Although it is a very plausible assumption, this correlation may overturn the previous prediction, i.e., the most optimistic one may contribute less than others´.
Optimistic about the election
'The idea is simple. Compared to others, the lobbyist expects his competitors to be very optimistic about the election, like himself, and thus expects the level of competition to be higher´, Chi says.
The idea is simple. Compared to others, the lobbyist expects his competitors to be very optimistic about the election, like himself, and thus expects the level of competition to be higher.
Assistant Professor Chang-Koo Chi
Since all contributions are non-refundable, the lobbyist may respond by contributing less. Consequently, the winner is neither always the most optimistic nor the most pessimistic one. The paper analyzes this contest game that features a «non-monotone» equilibrium.
In a simple version of the game, the paper characterizes the unique symmetric equilibrium and addresses the aggregate revenue accruing to the contest designer (the candidate in the lobbying example). The non-monotone equilibrium has important implications for the contest design. When the number of contestants is small, the all-pay contest is revenue-superior to the winner-pay contest.