Prizes (Size and Distribution) and Efforts

A major concern in the contest literature has been the issue of how do changes in the parameters of the contest (number, valuations and abilities of the contestants and the nature of the information they have) affect their equilibrium efforts and the extent of relative prize dissipation, Hillman and Riley (1989), Hurley and Shogren (1998), Konrad (2002), Nitzan (1994) and Nti (1997). In addition, attention has been paid to the effect of changes in these parameters on the contestants’ expected payoffs, Baik (1994), Gradstein (1995) and Nti (1997). The main concern of this chapter is further clarification of the effect of changes in public policy that determine the prize system on the total effort invested by the contestants. In particular, we wish to clarify why a more restrained government intervention that directly reduces the prizes of the two contestants may have the “perverse” effect of increasing their total exerted efforts. Our results hinge on the fundamental equation of the previous chapter VI, that decomposes the total effect on individual effort into two subeffects that correspond to the change in the two measures of intensity of competition. Using this equation, we show that the “prize-distribution effect” is always larger than the “size effect” (size of the sum of the prizes).