Economics Letters 114 (2012) 280283

Contents lists available at SciVerse ScienceDirect

Economics Letters
journal homepage: www.elsevier.com/locate/ecolet

Contest for power in organizations

Martin Gregor
Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Opletalova 26, Prague, CZ 110 00, Czech Republic

article info abstract

Article history: This paper explains the provision of private rent to powerful members in an organization as an outcome
Received 22 July 2010 of a contest for power that raises the total contributions to the organization. A necessary condition for a
Received in revised form socially efficient contest scheme with reimbursements is characterized.
12 October 2011
2011 Elsevier B.V. All rights reserved.
Accepted 20 October 2011
Available online 28 October 2011

JEL classification:
D23
D70
H41

Keywords:
Contest
Reimbursement
Rent-seeking
Collective good

1. Introduction
The market provision of collective goods often goes through
intermediary organizations that bundle members contributions,
coordinate their efforts, and save on economies in scale. Executive
discretion within the organization, nevertheless, creates an option
to leak a part of the organizations budget into private use. Aware
of this possibility, the members compete for control over the
organization, seeking a private rent that effectively rebates a
portion of their contributions.
For the organization, rebating a part of the contributions is
equivalent to not receiving the rebates at all. For an individual, the
presence of a contested rebate implies a dual role for a marginal
individual contribution: It increases the amount of the collective
good, and it also generates extra influence within the organization
that improves the chance of obtaining the contested private rent.
Thereby, the contest for this private rent artificially drops the
effective price of the collective good to an optimal level and even
below. Competition for power in an organization can thus be seen
as a decentralized mechanism to improve the collective action of
the organization. In the founding book on incentives for collective
action, Olson (1965) highlighted that successful interest groups use
selective incentives in the form of private goods that motivate
membership; our paper shows that mixing the provision of a
Tel.: +420 222 112 306; fax: +420 222 112 304.
E-mail address: gregor@fsv.cuni.cz.
0165-1765/$ see front matter 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.econlet.2011.10.027
private and collective good may improve the provision of the
collective good as long as the private good is offered as the prize
of a contest, with a sufficient level of discrimination.
This paper finds that a contest is efficient only if it applies a suffi-
ciently high, but not excessively large, marginal return. It also char-
acterizes the specific share of the budget that an organization must
convert into private rents in order to be able to provide an optimal
amount of the collective good. These results are derived under an
n-person symmetric pure strategy equilibria with complete infor-
mation, for a general utility over the private and collective good.
The idea of bundling a collective good with a private good
is closely related to literature on the use of charity lotteries
and charity auctions (Bos, 2010; Elfenbein and McManus, 2010).
In a seminal article, Morgan (2000) examined fixed-prize and
pari-mutuel-prize charity lotteries in the context of separable
utility functions. Goerree et al. (2005) found a first-best scheme
to raise donations for a public good, but only under linear
spillovers and k-th price auctions, which are rather unrealistic
in organizations. Bos (2011) and Faravelli (2011) extended their
results for heterogeneous endowments and a fixed multiple-prize
contest. Revenue comparisons of all-pay and first-price auctions
for a public good are subject to extensive experimental testing,
inter alia, in Lange et al. (2007), Carpenter et al. (2008), Schram
and Onderstal (2009) and Corazzini et al. (2010).
In contest literature, the effect of the positive spillovers of irre-
versible payments is well examined for linear parameterizations
(Baye et al., 2009). In our setup, the marginal rate of substitu-
tion decreases in its arguments, hence a positive spillover of the
 M. Gregor / Economics Letters 114 (2012) 280283 281

collective good decreases in the amount of contributions, which Below, we investigate equilibria in pure strategies, hence we must
is similar to Chung (1996), where non-linearity had a particular avoid the full dissipation associated with mixed strategies.1 With-
functional form. Contests with reimbursements have been investi- out a collective good (or positive spillover) but with a variable prize

X , this amounts to dxi = 1 + i + x i k xk < 0. Under symme-
gated in relatively few papers. Matros and Armanios (2009) study dc
i i
winner- and loser-reimbursement contests, but do not consider try and for logit-form contest success function, r < 1. In our case
rebates related to the opponents contributions. Chowdhury and
with the collective good, the condition dxi < 0 is equivalent to a
dc
Sheremeta (2010) offer a general setup with spillovers where some i

parameterizations of spillovers can be interpreted as reimburse- positive relative price of the collective good, (x; (n 1)x) > 0.
n
ments. Spencer et al. (2009) provide experimental support for the We may introduce an upper boundary r ( ) 1 + (n1)(1 ) ,
superior performance of proportional rebates in threshold public which is increasing, r ( ) > 0, and unbounded, r ( ) [1, +).
good games. Thus, even largely competitive contests r 1, r < r ( ), are sus-
The simple scheme analyzed here effectively combines three tained in pure strategies as long as 1. Alternatively, define a
(n1)(r 1)
spillovers: (i) A positive spillover through the joint collective lower boundary (r ) (n1)(r 1)+n = r 11 , which is increasing,
r + n1
good consumption, (ii) a negative spillover on private good
consumption caused by a lower share of the prize, and, if the (r ) > 0, and bounded, (r ) [1 n, 1). To sum up, the para-
prize is an increasing function of total contributions, also (iii) a metric support for pure-strategy equilibria is written S = {( , r ) :
positive spillover on private good consumption associated with max{0; sup (r )} 1; r > 0}. Proposition 1 delivers a nec-
an increase in the prize. A contest for power balances results essary condition for a scheme to be collectively efficient.
in uncompensated positive spillovers (larger collective good,
Proposition 1 (Efficient Linear Contest). A symmetric social opti-
larger prize) with an uncompensated negative spillover of the
mum is the Nash equilibrium in pure strategies under a linear scheme
competition (lower chance to obtain the prize). The construction of
an efficient scheme can thus be viewed as a problem of the optimal
( , r ) only if = r r 1 (0, 1) and r > 1.
design of winners and losers reimbursements in the presence of For symmetric contribution profiles, comparative statics over
spillovers (cf. Matros and Armanios, 2009). the contest parameters ( , r ) S reveal that the public good is
relatively cheaper if the contest is very competitive, r > 0. In
2. Linear schemes the case of the marginal contribution rate , we observe that the
effect of reimbursement is conditional upon r Q 1:
Let i = 1, . . . , n be identical agents endowed with income m >
(r 1)(n 1) < 0, r <1

0 and with a well-behaving utility u(ci , G), where ci 0 denotes
= = 0, r =1
i-th private good consumption and G 0 the collective good n 2 > 0, r > 1.
consumption. This guarantees a unique symmetric social optimum,
characterized by G = G . Each agent voluntarily contributes an The largest relative price occurs for r < 1 and 0:
amount xi 0 to a single organization, and the organization uses +. This is a case of a largely unattractive scheme, with almost
a share [0, 1] of the total contributions X nothing left for the collective good. All contests with > 1 are,

i x i for the
collective good, G = X . The remaining 1 share of the collected in fact, dominated by a direct purchase of the collective good (if
revenues is used as rent allocated to the contributors based on the feasible). For r < 1, the price falls with a large to a no-contest
relative shares/power (1 , . . . , n ), where we assume the logit- Nash level = 1. At r = 1, the price remains = 1 irrespective
form contestsuccess function with the elasticity of the payoff to of , which is equivalent to the analysis of a pari-mutuel raffle in
the marginal contribution r > 0, Morgan (2000). Only at r > 1 do we achieve < 1, if and only if
xri < 1.
i = In addition, consider the sign of spillovers. A contribution dxi >
xri xrj

+ 0 implies: (i) a decrease in its own private consumption, dci < 0,
j=i
(ii) an increase in public consumption, dG > 0, and also (iii) an
if X > 0, and i = 1n otherwise. A pair ( , r ) fully characterizes a increase in the opponents consumption, dci . The latter is
linear scheme. To avoid the issue of risk aversion, the rent attained straightforward since ci + ci = (1 )X , and:
is considered divisible, hence we effectively have n-tuple multiple dci d(1 )(xi + xi ) dci dci
prizes, (1 X , . . . , n X ). Assuming for simplicity of unit prices, the = =1 > 0.
consumption levels are: dxi dxi dxi dxi
+
(ci ; G) = (m xi + i (1 )X ; X ) .

The scheme affects the relative price of the private and collective Paradoxically, although the introduction of the contest scheme
good. In a classic public good game without any contest (equivalent generates an extra positive externality upon the opponent (if
to = 1, ci + xi = m), the marginal rate of the transformation of compared to the case without any contest), it improves efficiency
the private good and the public good consumption is one, as it reduces the wedge between the optimal and equilibrium
allocation. The explanation is that the contest scheme becomes a
dci
(xi ; xi ) = 1. reimbursement scheme where the size of the positive collective
dG good externality substantially diminishes, since only a -share of
With reimbursement ( < 1), the relative price of the public good the marginal contribution translates into the collective good.
is: Furthermore, notice that the supply side of the market with
the collective good may in fact consist of competing providers


1 (1 ) i + x i

i
xk who differ in ( , r ). Each generic pair represents a particular
(xi ; xi ) =
k
. relative price.2 A contributor selecting from a-organization and b-
organization favors a-organization if a < b , or:
In any symmetric profile,
n (1 )[1 + r (n 1)]
(x; (n 1)x) = 1 For a general condition characterizing full dissipation see Alcalde and Dahm
n
(2010).
n1 1 2 The relative price also falls with the number of contributors (increasing returns
= (1 r (1 )) + .
n n to scale), but we may neglect this effect and assume a large n, where a change
282 M. Gregor / Economics Letters 114 (2012) 280283

1 r (1 )
a a
1 r (1 )
b b n1 X (X )
< . r + (X ) > 0.
a b n X

Recall that for r > 1, the relative price satisfies r < 0 and Like in the linear case, the condition is more likely satisfied if the
marginal return r is small or the marginal contribution rate (X )

> 0, and that > (r ). Thus, for any r > 1, all schemes ( , r )
such that > > are both feasible, ( , r ) S, and preferred
to the efficient scheme, = 1n > > 0. To sum up, organiza-
tions with efficient contests ( = ) outcompete organizations
without contests ( = 1), but are crowded out by organizations
with excessive (overly aggressive) contests for power ( < ). In
a similar fashion, for r 1, we would observe that organizations
with large marginal contribution rates provide a better price, hence
the market winner for insufficiently competitive contests would be
an organization that prohibits contests for rent, = 1.
3. Non-linear schemes
For r = 1, Morgan (2000) established that a fixed-prize raffle
welfare-dominates a pari-mutuel raffle. In the previous section, we
nevertheless found that any linear scheme ( , r ) achieves the col-
lective optimum if r > 1. Thus, we may ask if non-linear schemes
such as a fixed-prized scheme can achieve the optimum as well.
A non-linear contest scheme is characterized by a function
(X ) : R+ R and the marginal return r > 0. Consumption
levels are written:
(ci ; G) = (m xi + i [X (X )] ; (X )) .
is high.
4. Conclusion
This paper analyzes whether a contest for power associated
with private rents may improve collective action in an organiza-
tion. The organization allocates a portion of the members contri-
butions into the collective good, and a portion into a private rent
that is subject to a contest between the members. Then, a neces-
sary condition for an efficient contest is the convexity in payoffs
(elasticity to marginal contribution r exceeding one), and a prize
at the 1r share of the total revenues implemented at the social op-
timum. To both provide the efficient amount of the collective good
and minimize the overall level of private rents, the organization
must apply a highly competitive contest for power. We also found
that although organizations with efficient contest schemes out-
compete organizations without contests, they are less attractive to
contributors than organizations with excessively competitive con-
tests.
Acknowledgments

The relative price is:

Comments by Peter Katuk and an anonymous referee were

1 i 1 (X ) x i [X (X )]

appreciated. Financial support by the Czech National Science
(xi ; xi ) = i
. Council (GACR 402/08/0501) and the Czech Ministry of Education
(X )
(MSM 0021620841) is gratefully acknowledged.
In a symmetric case, after rearranging,
(X )

n1 1 Appendix
(x; (n 1)x) = 1r +r + .
n (X ) X n
Proof of Proposition 1. A social optimum is self-sustaining only
Proposition 2 (Efficient Non-Linear Contest). A symmetric social if each contributor internalizes positive spillovers of their own
optimum is the Nash equilibrium in pure strategies under a non-linear contribution, hence pays only 1n of the marginal cost in the social
scheme (X ) only if ( r r 1 G ) = G and r > 1. optimum. There, the relative price should satisfy (x; (n 1)x) =
1
n
, which amounts to 1 r (1 ) = 0, or = r r 1 . Clearly, the
Proposition 2 brings in four interesting observations: (i) The
social optimum is not restricted by the lower bound, = r r 1 >
marginal contribution rate at the optimal allocation is irrelevant as
long as it is positive, (X ) > 0. (ii) Linear schemes as a subset of
r 1
1 = . Yet, it is restricted by non-negativity to = 0 if r 1.
r + n
non-linear schemes satisfying (X ) = X , [0, 1] achieve the
1
Thus, for r 1, the equilibrium amount is G = 2 x = 0 < G ,
social optimum for = , hence the average contribution rate which is inefficient. We must require r > 1. 
(X ) (X )
X
is bound to everywhere. In contrast, the condition X =
binds in a non-linear scheme only in the social optimum.
Proof of Proposition 2. We impose (x; (n 1)x) = 1
n
, which
(iii) The contested prize X (X ) must be in optimum for exactly simplifies to 1 r + r
(X )
= 0, or (X )
= r 1
. (Notice the
X X r
a 1r (0, 1) share of the total revenues X . In other words, a high (X )
equivalence to X = .) This condition must hold if evaluated
marginal return allows the use of an efficient contest with low total
in the social optimum, where G = (X ), hence X = r r 1 G .
private rents. (iv) A fixed-prize contest may achieve the optimum,

but with pre-determined r we must impose a prize Xr ; such a non- Imposing into the condition, we have 1 (G ) = X = r r 1 G . The

linear scheme is written (X ) = X Xr = X rG1 (i.e., it

feasibility of the scheme dictates that XG = r r 1 1, hence r 1.
(X )
becomes a deficit scheme for low levels of X ). If the organization Moreover, r = 1 since this would imply X
= 0 = (X ) = G ,
can manipulate r but needs to provide a fixed prize at maximal which is untrue. 
value V (e.g., due to regulatory constraints), it should impose V =
G
r 1
, hence r = 1 + GV . References
For linear schemes, we discussed the restriction (r ) that
helped us to avoid full dissipation. A similar condition exists in Alcalde, J., Dahm, M., 2010. Rent seeking and rent dissipation: a neutrality result.
the generalized non-linear case. We rewrite (xi ; xi ) > 0 in a Journal of Public Economics 94 (1), 17.
Baye, M., Kovenock, D., de-Vries, C.G., 2009 Contests with rank-order spillovers.
symmetric version as follows: Economic Theory doi:10.1007/s00199-009-0489-2.
Bos, O., 2010. Charity auctions for the happy few. Working Paper Series in Economics
45. University of Cologne, Department of Economics.
Bos, O., 2011. How lotteries outperform auctions. Economics Letters 110 (3),
in the organization membership of a single consumer does not affect the relative 262264.
prices. Otherwise, the shape of a stable partitioning of the system depends on extra Carpenter, J., Holmes, J., Matthews, P.H., 2008. Charity auctions: a field experiment.
assumptions. The Economic Journal 118, 92113.
 M. Gregor / Economics Letters 114 (2012) 280283
Chowdhury, S.M., Sheremeta, R.M., 2010. A generalized Tullock contest. Public
Choice 147, 413420.
Chung, T.Y., 1996. Rent-seeking contest when the prize increases with aggregate
efforts. Public Choice 87, 5566.
Corazzini, L., Faravelli, M., Stanca, L., 2010. A prize to give for: an experiment on
public good funding mechanisms. The Economic Journal 120, 944967.
Elfenbein, D.W., McManus, B., 2010. Last-minute bidding in eBay charity auctions.
Economics Letters 107 (1), 4245.
Faravelli, M., 2011. The important thing is not (always) winning but taking part:
funding public goods with contests. Journal of Public Economic Theory 13 (1),
122.
Goerree, J.K., Maasland, E., Onderstal, S., 2005. How (Not) to raise money. Journal of
Political Economy 113 (4), 897918.
283
Lange, A., List, J.A., Price, M.K., 2007. Using lotteries to finance public goods: theory
and experimental evidence. International Economic Review 48 (3), 901927.
Matros, A., Armanios, D., 2009. Tullocks contest with reimbursements. Public
Choice 141, 4963.
Morgan, J., 2000. Financing public goods by means of lotteries. The Review of
Economic Studies 67 (4), 761784.
Olson, M., 1965. The Logic of Collective Action: Public Goods and the Theory of
Groups. Harvard University Press.
Schram, A., Onderstal, S., 2009. Bidding to give: an experimental comparison of
auctions for charity. International Economic Review 50 (2), 431457.
Spencer, M.A., Swallow, S.K., Shogren, J.F., List, J.A., 2009. Rebate rules in threshold
public good provision. Journal of Public Economics 93, 798806.