American Economic Journal: Microeconomics
no. 3, August 2023
This paper studies optimal bid caps in a multiplayer noisy contest in which a higher bid does not guarantee a sure win. The bid cap can be either rigid or flexible. The former imposes outright bidding restrictions on players' bids, while the latter taxes bids. A designer structures the bid cap to maximize a weighted sum between aggregate bid and tax revenue. Our analysis characterizes the optimum. A rigid bid is always outperformed by flexible ones, and a laissez-faire policy—i.e., no cap—is optimal when the designer maximizes the aggregate bid. The results also generate novel practical implications.
Fu, Qiang, Zenan Wu, and Yuxuan Zhu.
"Bid Caps in Noisy Contests."
American Economic Journal: Microeconomics,
Asymmetric and Private Information; Mechanism Design