INTRODUCTION TO CONTEST THEORY

1 Definition
• A contest describes a situation where two or more agents ("con-
testants") spend resources in order to obtain a certain desirable out-
come ("win a prize").

• Formally, a contest can be characterised by the following elements:

— A set of contestants N = {1, ..., n}

— A prize B to be allocated among the contestants
— Contestant i’s valuation of the prize: vi (B)
— Each contestant i ∈ N can make an effort xi , at a cost Ci (xi )
∗ Notice that a lower valuation of the prize is equivalent to
having a higher cost of making the effort, and vice versa
∗ If effort is measured in monetary units, then Ci (xi ) = xi
— The probability that contestant i wins the prize is given by the
contest success function pi = pi (x1 , ..., xn )
— Thus, contestant i has an ex ante expected payoff of

π i (x1 , ..., xn ) = pi (x1 , ..., xn ) vi (B) − Ci (xi ) . (1)

2 Examples
• An illustrative specific example:

— a certain number of cities competing for becoming the location

of the next Olympic Games
— each city spends money on architects, marketing agencies, lobby-
ing, etc, in order to "improve" its proposal, increasing the prob-
ability of being chosen

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 • General political economy examples:

— political lobbying
∗ rent-seeking
∗ beauty contests (e.g., the Olympic Games example)
— political campaigning
— bribery

• Other examples:

— promotional (advertising) competition

— litigation
— internal labour market tournaments (promotion contests)
— R&D contests
— military conflict
— sports

3 Fully discriminatory contests

• First-price all-pay auction

• The contestant who expend the highest effort in the contest, wins the
prize for sure

• More relevant for cases where

— contest effort translates deterministically into some observable

quality or quantity variable for each contestant
— the allocation of the contested prize is made on the basis of a
comparison of the value of this variable across the different con-
testants

• Assume two contestants: 1 and 2

2
 — Their valuations of the prize are given by v1 ≥ v2 > 0.
— The effort cost function is C (xi ) = xi , i = 1, 2.
— The contest success function for contestant 1 is


 1 if x1 > x2
p1 = 1 , (2)
 2 if x1 = x2

0 if x1 < x2

while the contest success function for contestant 2 is p2 = 1 − p1 .

— The players choose their efforts, xi ≥ 0, simultaneously to max-
imise expected profits, given by (1).

• This game has no Nash equilibrium in pure strategies

• Mixed strategy equilibrium:

(
x1
v f or x1 ∈ [0, v2 ]
F1 (x1 ) = (3)
1 f or x1 > v2

and ( ³ ´
v2 x2
1− v1 + v1 f or x2 ∈ [0, v2 ]
F2 (x2 ) = , (4)
1 f or x2 > v2

where Fi (xi ) is the cumulative distribution function for the effort

choice of contestant i.

• Expected payoffs in equilibrium are

E (π 1 ) = v1 − v2

and
E (π 2 ) = 0.

• Expected efforts in equilibrium are

v2
E (x1 ) =
2

3
 and
(v2 )2
E (x2 ) = .
2v1

• Notice that the prize will not always be allocated to the contestant
with the higher valuation.

• If there are more than two players, with

v1 ≥ v2 > v3 ≥ v4 ≥ ... ≥ vn ,

then the unique equilibrium has xi = 0 for i > 2, while contestants 1

and 2 play (3) and (4), respectively.

4 Non-discriminatory contests
• In many contests there are some noise and elements of randomness

• In contests with noise, the contestant expending the highest effort does
not win the contest with certainty

— typical example: political lobbying (rent-seeking) contests

• The most commonly used imperfectly discriminating contest is the

Tullock contest

• In a standard Tullock contest, the contest success function is given by

( r
Snxi if max {x1 , ..., xn } > 0
xrj
pi (x1 , ..., xn ) = j=1 , (5)
1
n otherwise

where r > 0.

• The parameter r represents the returns to contest effort (in terms of

success probability)

— If r < 1, there are decreasing returns to effort

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 — If r > 1, there are increasing returns to effort
— If r = 1, there are constant returns to effort

• The special case of r = 1 is the "lottery contest".

— the probability of winning corresponds to the relative shares of

"lottery tickets"

• The Tullock contest success function converges to the contest success

function of a perfectly discriminatory contest, (2), when r → ∞

4.1 A general example of the Tullock contest

• n players, with valuations v1 ≥ v2 ≥ ... ≥ vn

• Effort is measured in monetary terms: C (xi ) = xi

• The contest success function is given by (5)

• Contestants choose effort simultaneously

• Expected profit for contestant i is

xr
E (π i ) = Pn i r vi − xi .
j=1 xj

• The first-order condition for optimal effort by contestant i is

P
∂E (π i ) rxr−1
i
r
j6=i xj
= ³P ´2 vi − 1 = 0. (6)
∂xi n r
j=1 xj

4.1.1 Special Case 1: Equal valuations (v1 = v2 = ... = vn = v)

• Imposing symmetry, xi = x, in (6) yields

rxr−1 (n − 1) xr
v−1=0
(nxr )2

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 • Solving for x yields
(n − 1)
x= rv (7)
n2
— individual contest effort is
∗ increasing in the valuation of the prize (v)
∗ increasing in the parameter r
∗ decreasing in the number of contestants (n)

• Total contest effort is

n
X µ ¶
n−1
X= xi = nx = rv. (8)
n
i=1

• Total contest effort is increasing in the number of contestants

n
• Notice that this pure strategy Nash equilibrium exists only if r ≤ n−1

— Expected profits in the pure strategy equilibrium are

1 (n − 1)
E (π) = v− 2
rv
nµ µn ¶ ¶
v n−1
= 1− r
n n
n
— Expected profits are non-negative only if r ≤ n−1
n
— For r > n−1 , expected profits from playing (7) is negative and
each contestant can do better by choosing zero effort.
n
— For r > n−1 , only mixed strategy equilibria exist.

Rent dissipation
• Rent dissipation is measured by the ratio of total effort and the
valuation of the prize: Xv

• In the pure strategy equilibrium, the degree of rent dissipation is given

by µ ¶
X n−1
= r ∈ (0, 1)
v n

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 n
• Notice that, since r ≤ n−1 , there is never overdissipation in the pure
strategy equilibrium.

• The contested rent is fully dissipated only in the extreme case of r = 1

and free entry (n
/ → ∞)

• If r < 1, there is always underdissipation of the rent, even with free

entry of contestants.

— this means that rents survive even under perfect competition from
an infinite number of potential contestants!

4.1.2 Special Case 2: Two contestants with unequal valuations

• Setting n = 2, the first-order condition (6) can be rewritten as

rxr−1
i xrj
vi = 1; i, j = 1, 2; i 6= j
(xr1 + xr2 )2

• Taking the ratio of the two first-order conditions yields

x1 x2
= ,
v1 v2

implying
x1 ≥ x2 (since v1 ≥ v2 by assumption).

• The player who value the prize more expends more effort in the contest

• Both players dissipate the same (constant) fraction of their valuations

in rent-seeking activities, regardless of the parameter r.

4.1.3 Special Case 3: The lottery contest (r = 1)

• Setting r = 1, the first-order condition (6) reduces to

P
j6=i xj
³P ´2 vi − 1 = 0,
n
j=1 xj

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 which can be written as

(X − xi ) vi
= 1,
X2
Pn
where X = j=1 xj is total contest effort.

• Solving for xi yields µ ¶

X
xi = X 1 − (9)
vi

• By summing over n, we can derive total contest effort in equilibrium

n n µ ¶ Ã n
!
X X X X 1
X= xi = X 1− =X n−X ,
vi vi
i=1 i=1 i=1

which, when solving for X, yields

n−1
X = Pn 1 .
i=1 vi

Alternatively, this expression can be written as

µ ¶
n−1
X= Ven , (10)
n
³P ´−1
where Ven = n n 1
i=1 vi is the harmonic mean of the contestants
valuations.

• Notice from (9) that a contestant will participate in the contest (i.e.,
choosing xi > 0) if X < vi .

— Total effort is always lower than the valuation of the active player
with the lowest valuation of the prize.
— In general: More unequal valuations among the contestants will
reduce total effort

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5 Extensions to the standard contest set-up
• Entry fees to participate in the contest

• Multiple prizes

• Budget constraints

• Endogenous prizes

— Contest effort affects the players’ valuations of the prize

• Delegation

• Sabotage

• Contests for a public good

• Strategic alliances

6 Contest design
• How should a contest administrator optimally design a contest?

— how many contestants?

— which type of contestants?
— entry fees or not?
— optimal choice of prize
— influence the cost-of-effort for the contestants

• What is the objective function of a contest designer?

— maximise total effort?