The effect of competition in contests: A unifying approach

Abstract: We study how increasing competition, by making prizes more unequal, affects effort in contests. In a finite type-space environment, we characterize the equilibrium, analyze the effect of competition under linear costs, and identify conditions under which these effects persist under general costs. Our findings reveal that competition may encourage or deter effort, depending on the relative likelihood of efficient versus inefficient types. We derive implications for the classical budget allocation problem and establish that the most competitive winner-takes-all contest is robustly optimal under linear and concave costs, thereby resolving an open question. Methodologically, our analysis of the finite type-space domain -- which includes complete information as a special case and can approximate any continuum type-space -- provides a unifying approach that sheds light on the contrasting results in these extensively studied environments.