Fabio Michelucci (Ca’ Foscari, Venice and CERGE-EI, Prague)

“How to Pick a Winner”

Abstract: We study a two-period model in which two agents of different and privately known abilities compete for a single prize by exerting costly effort. A risk-neutral principal can affect the outcome of the contest by allocating resources to agents in each period, and her net payoff depends on the relative share allocated to the winner. We analyze how the principal optimal strategy depends on the severity of moral hazard. The results we derive are consistent with stylized facts regarding the dynamics of political campaign contributions and of third-party intervention in military conflicts.