Optimal favoritism in contests with identity-contingent prizes

Abstract

We investigate optimal favoritism using identity-contingent prizes in a two-player Tullock model. Besides the usual balance effect, prize allocation has an extra efficiency effect: One additional unit of prize tends to induce more effort, if it is used as the winning prize for the stronger player whose marginal cost is lower. We find that a total-effort-maximizing (contest) designer should offer a larger prize to the strong player if and only if the contest is sufficiently noisy. Our paper provides a more complete analysis on identity-contingent prizes, which completes the conventional insight on levelling battle field for effort maximization in contests with asymmetric players.