All-Pay Auctions vs. Lotteries as Fundraising Mechanisms: Theory and Evidence

Alexander Matros
Economics University of South Carolina

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     Last modified: November 14, 2010
     Presentation date: 03/12/2011 10:45 AM in NH 1150, Session D
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Abstract
We study two related mechanisms for financing public goods: an all-pay auction and a lottery. To enable the simplest possible comparison, we consider the complete information case where the value of the single prize is common and known to all participants. In this setting, we show that all-pay auctions always outperform lotteries in terms of expected public good provision. Indeed, for small numbers of participants and a low marginal per capita return (mpcr) on the public good, lotteries may generate no contributions to the public good. By contrast, for any given mpcr, public good contributions using the all--pay auction are invariant to the number of participants. We test these predictions in a laboratory experiment where we vary the number of participants, n, the mpcr, and the mechanism, lottery or all-pay auction. Consistent with the theory, we find that the mpcr matters for contribution amounts under either 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. The latter finding may explain the why lotteries are the more commonly observed mechanism for generating public good contributions.