Enhancing Effort Supply With Prize‐augmenting Entry Fees: Theory and Experiments

Abstract

Entry fees are widely observed in contests. We study the effect of a prize‐augmenting entry fee on expected total effort in an all‐pay auction setting where the contestants' abilities are private information. An entry fee reduces equilibrium entry but can enhance the entrants' effort supply. Our theoretical model demonstrates that the optimal entry fee is strictly positive and finite. In a laboratory experiment, we empirically test the effect of entry fees on effort supply. Our results provide strong support for the notion that a principal can elicit higher effort using an appropriately set entry fee to augment the prize purse.

Contests with entry fees: theory and evidence

“…In contrast, the revenue maximizing entry fee in our experiment is much greater than the theoretical prediction. However, the Hammond et al (2019) setting is different from our model and experiment; in their setting, the winner's prize depends on the entry fee.…”

“…As for related literature, there are several papers, Anderson and Stafford (2003), Boosey et al (2020), and Hammond et al (2019), that also study contests with entry fees. Anderson and Stafford (2003) test the theoretical predictions of Gradstein (1995) using an experimental design with a variable number of players, cost heterogeneity, and a fixed entry fee.…”

“…Finally, Hammond et al (2019) investigate contests with prize-augmenting entry fees both theoretically and experimentally. Moreover, their model incorporates different abilities of the players (which are their private information) and entry fees increase the winner's prize.…”