DP14411 Reverse Contests
We study two reverse contests, A and B, with two agents, each of whom has both a linear reward function that increases in the agent's effort and an effort constraint. However, since the effort (output) of the agents has a negative effect on society, if the agents' effort constraints are relatively high, the designer in reverse contest A imposes a punishment such that the agent with the highest effort who caused the greatest damage is punished. Conversely, if the agents' effort constraints are relatively low, in reverse contest B, the designer awards a prize to the agent with the lowest effort who caused the smallest damage. We analyze the behavior of both symmetric and asymmetric agents in both contests A and B. In equilibrium, independent of the levels of the agents' effort constraints, both agents are active and they have positive expected payoffs. Furthermore, the agents might have the same expected payoff regardless of their asymmetric values of the prize/punishment or their asymmetric effort constraints.
