How (not) to raise money

Creators: Goeree, Jacob K.; Maasland, Emiel; Onderstal, Sander; Turner, John L.

Abstract

We show that standard winner-pay auctions are inept fund-raising mechanisms because of the positive externality bidders forgo if they top another's high bid. Revenues are suppressed as a result and remain finite even when bidders value a dollar donated the same as a dollar kept. This problem does not occur in lotteries and all-pay auctions, where bidders pay irrespective of whether they win. We introduce a general class of all-pay auctions, rank their revenues, and illustrate how they dominate lotteries and winner-pay formats. The optimal fund-raising mechanism is an all-pay auction augmented with an entry fee and reserve price.

Additional Information

© 2005 The University of Chicago. Financial support from the National Science Foundation (SBR 0098400), the Alfred P. Sloan Foundation, and the Dutch National Science Foundation (NWO-VICI 453-03-606) is gratefully acknowledged. We should like to thank Richard Ashley, John Ledyard, John Morgan, Claus Weddepohl, an anonymous referee, an associate editor, and seminar participants at Caltech, Virginia Tech, University of North Carolina at Chapel Hill, the University of Amsterdam, the Midwest Economic Theory meetings in Madison, WI, the European Economic Association meetings in Venice, and the Latin American Econometrics Society meetings in São Paulo for useful suggestions.

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