CONTEST DESIGN AND OPTIMAL ENDOGENOUS ENTRY

Authors

  • QIANG FU,

    1. Fu: Assistant Professor, Department of Business Policy, National University of Singapore, 1 Business Link, Singapore 117592. Phone (65)6516-3775, Fax (65)6779-5059, E-mail: bizfq@nus.edu.sg
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  • JINGFENG LU

    1. Lu: Assistant Professor, Department of Economics, National University of Singapore, 1 Arts Link, Singapore 117570. Phone (65) 6516-6026, Fax (65) 6775-2646, E-mail: ecsljf@nus.edu.sg
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    • *

      Special thanks are due to Michael Baye, Dan Kovenock, and Preston McAfee for their encouragement and helpful suggestions. We are grateful to the editor and three anonymous referees for constructive comments. The paper has greatly benefited from them. All errors remain ours. The authors gratefully acknowledge the financial support from National University of Singapore (R-313-000-068-112 [Q.F.] and R-122-000-088-112 [J.L.]).


Abstract

This paper derives the effort-maximizing contest rule and the optimal endogenous entry in a context where potential participants bear fixed entry costs. The organizer is allowed to design the contest under a fixed budget with two strategic instruments: the value of the prize purse and a monetary transfer (entry subsidy/fee) to each participating contestant. The results show that the optimally designed contest attracts exactly two participating contestants in its unique subgame perfect equilibrium and extracts all the surplus from participating contestants. The direction (subsidy or fee) and amount of the monetary transfer depend on the magnitude of the entry cost. (JEL C7, D7)

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