All-Pay Auctions vs. Lotteries as Provisional Fixed-Prize Fundraising Mechanisms: Theory & Evidence

Economics

Speaker:Alexander Matros, Lancaster University
Date: Friday 2 March 2012
Time: 16.15
Location: STC/D

Further details

We study two provisional fixed-prize mechanisms for funding public goods: an all-pay auction and a lottery. In our setting, the public good is provided only if the participants’ contributions are greater than the fixed-prize value; otherwise contributions are refunded. We prove that in this provisional fixed prize setting, lotteries can outperform all-pay auctions in terms of expected public good provision. Specifically, we state conditions under which the provisional fixed prize all-pay auction mechanism generates zero public good provision, while the provisional fixed prize lottery mechanism generates positive public good provision. We test these predictions in a laboratory experiment where we vary the number of participants, the marginal per capita return (mpcr) on the public good and the mechanism for awarding the prize, either a lottery or an all-pay auction. Consistent with the theory, we find that the mpcr matters for contribution amounts under the lottery mechanism. However, inconsistent with the theory bids are always significantly higher than predicted and there is no significant difference in public good contributions under either mechanism.