Outsourcing in contests

We study ex post outsourcing of production in an imperfectly discriminating contest, interpreted here as a research tournament or a procurement contest for being awarded some production contract. We find that the possibility of outsourcing increases competition between the contestants, leading to higher total contest effort, if the contest winner is expected to obtain a sufficiently large share of ex post outsourcing rents. Under reasonable assumptions, outsourcing tends also to increase the number of active contestants, strengthening the case for outsourcing to increase total contest effort. If such effort is socially wasteful, outsourcing creates a welfare trade-off between ex ante and ex post efficiency.     

Winner-pay contests

We analyze winner-pay contests in which players select bids, the winner is determined probabilistically through a contest success function, and only the winner must pay her bid. We show that a pure-strategy Nash equilibrium exists and is unique under weak assumptions on the contest success function. We determine the Nash equilibrium for several examples. We also consider how equilibrium bids are influenced by private information about the value of winning the contest.     

Efforts in two-sided contests

The degree of rent dissipation is studied in extended two-sided contests that involve two types of efforts. While usual contestants expend resources in trying to win the contested prize, potential recipients of the rent-seeking efforts also participate in the contest. This is due to uncertainty regarding the source of power in the contest that induces the bureaucrats to expend resources to increase their share in the rent-seeking efforts by trying to appear as the party controlling the allocation of the prize. We show that the existing theoretical and empirical studies are incomplete and may underestimate the extent of rent dissipation.     

Biased contests

We examine the effects of providing more accurate information to a political decision-maker lobbied by competing interests. We investigate how this bias in the direction of the correct decision affects efficiency, measured (inversely) by both the probability of taking an incorrect decision, and the amount of social waste associated to lobbying activities. We present a benchmark model in which increasing the bias always improves efficiency. However, this result is fragile as slight changes in the contest success function lead to slightly different models in which under either criterion there is no guarantee that more accurate information improves the decision.     

Sequential contests revisited

In a past issue of this journal, Morgan (Public Choice 116:1–18, 2003) finds that aggregate effort is greater in sequential than in simultaneous lottery contests. We show that Morgan’s result is incorrect owing to a slip in a proof, and that aggregate effort turns out to be greater in sequential contests only if the contestants are sufficiently homogeneous. Additionally, we discuss the robustness of the corrected result to different specifications of the contest success function, and we partially restore Morgan’s case for sequential contests by showing that these contests are more desirable when maximizing only the effort of the winner, rather than maximizing the aggregate effort.     

Learning by doing in contests

We introduce learning by doing in a dynamic contest. Contestants compete in an early round and can use the experience gained to reduce effort cost in a subsequent contest. A contest designer can decide how much of the prize mass to distribute in the early contest and how much to leave for the later one in order to maximize total efforts. We show how this division affects effort at each stage, and present conditions that characterize the optimal split. There is a trade off here, since a large early prize increases first period efforts leading to a substantial reduction in second round effort cost; on the other hand, there is less of the prize mass to fight over in the second round, reducing effort at that stage. The results are indicative of the fact that the designer often prefers to leave most of the prize mass for the second contest to reap the gains from the learning by doing effect.     

Influencing rent-seeking contests

This paper shows that a policy that uniformly increases contestants’ effort costs can lead to an increase in total effort. In asymmetric settings, this “levels the playing field” and therefore encourages weaker players (who otherwise would have stayed out) to enter. Paradoxically, a contest designer whose only objective is to maximize total effort may thus wish to make rent-seeking “more difficult.” These results suggest that the often-lamented bureaucratic red tape might in fact be a rational response to the problem of attracting lobbyists to participate in a contest.     

Evolutionarily stable preferences in contests

We define an indirect evolutionary approach formally and apply it to (Tullock) contests. While it is known that the direct evolutionary approach in the form of finite population ESS yields more aggressive behavior than in Nash equilibrium, it is now shown that the indirect evolutionary approach yields the same more aggressive behavior, too. This holds for any population size N, if the evolution of preferences is determined by behavior in two-player contests. The evolutionarily stable preferences (ESP) of the indirect approach turn out to be negatively interdependent, thereby “rationalizing” the more aggressive behavior.     

Competitive-share group formation in rent-seeking contests

We examine the possibility of forming a competitive-share group in rent-seeking contests. The competitive-share group has the following characteristics: (a) the group is treated as a single player competing with the nonmembers to win the rent, (b) the members choose their outlays noncooperatively, and (c) the members compete to take larger shares of the rent. We show that the competitive-share group is always formed voluntarily. One important consequence of such group formation is that rent dissipation is less relative to individual rent seeking — in other words, the social cost associated with rent seeking is less.     

Performance and prize decomposition in contests

This paper focuses on the effect of additive contest decomposition on performance: winning probabilities and efforts of the contestants. Our main result provides a sufficient condition for invariance of contest performance to the decomposition of a contest, when the sum of the possibly differently valued prizes in the segmented contests is equal to the value of the prize in the original grand contest and the relative prizes in the sub-contests are equal for every contestant. It is shown that this condition is satisfied by the commonly used exponential logistic contest success functions. With these functions the contest designer does not have an incentive to split the prize and create additive, segmented sub-contests. We then prove that when the additive contest decomposition is asymmetric, contest decomposition may adversely affect the designer; that it, reduce the total efforts of the contestants.     

On being asset-constrained in litigation contests

This paper establishes that being asset-constrained may be advantageous for defendants in litigation contests. An active asset constraint of defendants (i) may increase (decrease) defendant (plaintiff) contest effort, (ii) may lower the sum of plaintiff and defendant contest effort, (iii) lowers expected defendant payment, and (iv) makes a symmetric contest asymmetric.     

Information alliances in contests with budget limits

We study the role of information exchange that may occur in alliances in a contest without noise. Contestants learn their own limits of what they can spend in a contest. They may also form alliances and learn the limits of all players who are within the same alliance. Then they decide independently about their own contest efforts. Alliance formation for the purpose of information exchange is beneficial for members of the same alliance and neutral for all other players. Also, a merger between alliances is beneficial for their members. Further, we identify and discuss the set of stable alliance combinations.     

The Effects of Foreclosure Counseling for Distressed Homeowners

In the face of the housing market downturn of the late 2000s, policymakers promoted third‐party mortgage default counseling as a way to help people at risk of losing their homes to avoid foreclosure. Using a unique data set of monthly loan payments remitted to investors combined with administrative data from a national counseling agency, this study estimates the effects of default counseling on the probability that troubled mortgage borrowers will lose their homes to foreclosure. Borrowers are actually more likely to miss loan payments after receiving counseling, but the probability of losing a home to foreclosure drops after counseling, suggesting that counseling policies may be beneficial during housing crises.     

Rent-seeking contests with incomplete information

We consider rent-seeking contests with two players who each have private information about their own cost of effort. We consider both discrete and continuous distributions of costs and give results for each case, focusing on existence of equilibrium.     

Goods or resource contests?

In this paper we analyze the optimal mix between appropriative and defensive activities for goods (goods contest) and appropriative and defensive activities for resources (resource contest). We show that goods contests are qualitatively different from resource contests. It turns out that for plausible cases the resource contest is dominated by the goods contest in the sense that investments are only positive in the latter.     

Asymmetric contests with liquidity constraints

We consider two bidders with asymmetric valuations competing to win an exogenous prize. Capital markets are imperfect, such that the contestants possibly face a liquidity constraint. We show that aggregate investments are lower if at least one bidder has a liquidity constraint, even if the low-valuation bidder possibly increases his/her investments. Furthermore, the effect of the high-valuation bidder’s liquidity constraint on competitive balance is ambiguous. However, if the low-valuation bidder is constrained, greater wealth unambiguously increases competitive balance. Surprisingly, if the low-valuation bidder has a constraint, a tighter constraint can increase his/her profit.     

The incidence of overdissipation in rent-seeking contests

Tullock's analysis of rent seeking and overdissipation is reconsidered. We show that, while equilibrium strategies do not permit overdissipation in expectation, for particular realizations of players' mixed strategies the total amount spent competing for rents can exceed the value of the prize. We also show that the cross-sectional incidence of overdissipation in the perfectly discriminating contest ranges from 0.50 to 0.44 as the number of players increases from two to infinity. Thus, even though the original analysis of overdissipation is flawed, there are instances in which rent-seekers spend more than the prize is worth.     

On disclosure policy in contests with stochastic entry

We study how a contest organizer who seeks to maximize participant effort should disclose the information on the actual number of contestants in an imperfectly discriminatory contest with stochastic entry. When each potential contestant has a fixed probability of entering the contest, the optimal disclosure policy depends crucially on the properties of the characteristic function H(?)=f(?)/f ^??(?), where f(?) is the impact function. The contest organizer prefers full disclosure (full concealment) if H(?) is strictly concave (strictly convex). However, the expected equilibrium effort is independent of the prevailing information disclosure policy if a linear H(?) (Tullock Contest) applies.     

Symmetric two-stage contests with budget constraints

The impact of a budget constraint on individual expenditures is examined in two models of two-stage contests with homogenous and risk-neutral players competing to win a single, indivisible, commonly valued rent. The set of players is partitioned into equally sized groups. In the first model, one contestant from each group survives to compete on the second stage against the other survivors. In the second model, one group survives the first stage and its members compete against each other on the second stage. We derive and discuss the symmetric subgame perfect equilibrium solution for each model.