Matthew Wildrick Thomas

When opposing parties compete for a prize, the sunk effort players exert during the conflict can affect the value of the winner’s reward. These spillovers can have substantial influence on the equilibrium behavior of participants in applications such as lobbying, warfare, labor tournaments, marketing, and R&D races. To understand this influence, we study a general class of asymmetric, two-player all-pay contests where we allow for spillovers in each player’s reward. The link between participants’ efforts and rewards yields novel effects – in particular, players with higher costs and lower values than their opponent sometimes extract larger payoffs.

A contest designer may wish to disadvantage a stronger player to improve competitiveness. We show this can be done in all-pay auctions such that the game is fair (i.e. symmetric) ex-ante. Yet, the stronger player is endogenously offered a lower prize in expectation. Thus, discrimination is covert.