The design of rent-seeking competitions: Committees, preliminary and final contests

Abstract

The paper examines the common practice in multi-contest rent- seeking competitions, where “finalists” are selected, based on rent-seekers' efforts in a preliminary contest. We find that for any single-contest design, rent-seeking expenditures could be reduced by introducing a preliminary contest, if the marginal returns to rent- seeking effort in the preliminary contest is sufficiently low. In addition to other reasons, the paper argues that this may explain why such multi-contest designs are common. We argue that rent-seeking expenditure in the preliminary stage represents the cost of reducing the number of contestants. We also find that the practice of setting a higher “quality” standard in the final contest than the “quality” standard in the preliminary contest reduces rent-seeking waste. We derive an expression for the optimal number of finalists; under certain conditions we find that the optimal number of finalists is directly proportional or equal to the square root of the number of potential contestants. Finally, we show that whether rent-seeking expenditures rise or fall when the rent is awarded by a committee instead of a single administrator depends on the sensitivity of the committee relative to that of the single administrator.