Information disclosure in all-pay contests with costly entry (Q6113208)

The author models a contest with a single prize and two risk-neutral contestants where the contest organizer controls the ability of the contestants to value the prize through a precommitted information disclosure policy, and sets an entry fee. The contestants have independent, identically distributed valuations for the prize taking two possible values \(\{v_{H},v_{L}\}\) with probability \(p\) and \(1-p\), respectively. The entry fee is exogenous public information. The contest is run, as follows. \begin{itemize} \item[1.] The organizer announces an information disclosure policy, which generates the contestants' private valuation. \item[2.] Contestants simultaneously and confidentially make their participation decisions. Participating contestants incur the entry fee. Non-participating contestants do not pay or receive anything. \item[3.] The organizer reveals information according to the disclosure policy announced. Participating contestants update their valuation of the prize and choose their effort levels. \item[4.] The prize is awarded to the participating contestant who exerts the highest effort. The other participating contestant, if any, does not receive anything. \end{itemize} Information disclosure is modeled as a random variable: with probability \(\alpha\), the contest organizer fully informs the contestants of the prize, allowing correct valuation; with probability \(1-\alpha\) the contest organizer fully conceals information about the prize, in which case the contestants' valuation of the prize is \(\bar v = p\cdot v_{H} +(1-p)\cdot v_{L}\). Using a characterization of the unique equilibrium in standard incomplete-information all-pay auctions with discrete signals by \textit{R. Siegel} [J. Econ. Theory 153, 684--702 (2014; Zbl 1309.91073)], the author shows that in case of free entry (\(c=0\)), no transparency (\(\alpha = 0\)) induces higher expected total contestant effort than full transparency (\(\alpha = 1\)). In the \(c>0\) case, it is shown that expected total contestant effort is higher for \(\alpha = 1\) than for \(\alpha = 0\) if and only if \(c \geq \bar v-\sqrt{\bar v\cdot (p^2\cdot v_{H} +(1-p^2)\cdot v_{L})}\), and that the optimal \(\alpha\) continuously increases with \(c\). That is, as the entry fee increases, it is \textit{ex-ante} optimal for the organizer to increase information transparency to attract entry, and the optimal information disclosure policy needs to balance between incentivizing entry and \textit{ex-post} effort elicitation.