Journal of Economic Behavior & Organization
Volume 91, July 2013, Pages 34-50
Optimal punishment in contests with endogenous entry
Jonathan P.Thomasa ZheweiWangb
a School of Economics, University of Edinburgh, 31 Buccleuch Place, Edinburgh, EH8 9JT, UK
b School of Economics, Shandong University, 27 Shanda Nanlu, Jinan 250100, China
We study optimal punishment in an all-pay contest with endogenous entry, where the participant with the lowest performance may be punished. When a small punishment is introduced, the lowest ability players drop out and those of medium ability exert less effort, while only the highest ability players exert more effort. A sufficient condition is given for the optimal punishment to be zero if the objective is to maximize the expected total effort. As cost functions become more convex, punishment becomes less desirable. When the objective is to maximize the expected highest individual effort, a positive punishment is desirable under much weaker conditions.
