Abstract
We investigate optimal favoritism using identity-contingent prizes in a two-player Tullock model. Besides the usual balance effect, prize allocation has an extra efficiency effect: One additional unit of prize tends to induce more effort, if it is used as the winning prize for the stronger player whose marginal cost is lower. We find that a total-effort-maximizing (contest) designer should offer a larger prize to the strong player if and only if the contest is sufficiently noisy. Our results are in contrast to conventional wisdom obtained from contest models with biased winner selection rules, in which leveling the playing field is always preferable in a two-player setting.
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