Equity and effectiveness of optimal taxation in contests under an all-pay auction

The means of contest design may include differential taxation of the prize. This paper considers all-pay auctions under complete information and establishes that, given a revenue-maximizing contest designer who faces a balanced-budget constraint, the optimal taxation scheme corresponding to an all-pay auction is appealing in two senses. First, it ensures extreme equitable final prize valuations. Second, it is effective; it yields total contestants’ efforts that are larger than those obtained under almost any pure-strategy equilibrium of a Tullock-type lottery contest. Copyright Springer-Verlag Berlin Heidelberg 2014