The All-pay Auction with Handicaps

*Pablo Casas-Arce
Universitat Pompeu Fabra, Department of Economics and Busine

Asís Martínez-Jerez
Harvard Business School, Accounting Department

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     Last modified: December 4, 2010
     Presentation date: 03/12/2011 2:45 PM in NH 1130, Session B
     (View Schedule)

Abstract
This paper derives the equilibrium of an all-pay auction with handicaps. This auction provides new insights into the effects of heterogeneity among participants on their behavior in a tournament. We apply these results to static contests with participants that differ in their ability. We also use these results to derive the equilibrium of a two-stage all-pay auction, which corresponds to a dynamic tournament where the heterogeneity arises in the second period from differences in past performance. We show that effort is highest for participants in intermediate positions. The results are helpful to understand the incentives to engage in preemptive bidding in the early periods of a dynamic tournament.