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How (Not) to Raise Money

Jacob K. Goeree, Emiel Maasland, Sander Onderstal and John L. Turner
Journal of Political Economy
Vol. 113, No. 4 (August 2005), pp. 897-918
DOI: 10.1086/431288
Stable URL: http://www.jstor.org/stable/10.1086/431288
Page Count: 22
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How (Not) to Raise Money
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Abstract

We show that standard winner‐pay auctions are inept fund‐raising mechanisms because of the positive externality bidders forgo if they top another’s high bid. Revenues are suppressed as a result and remain finite even when bidders value a dollar donated the same as a dollar kept. This problem does not occur in lotteries and all‐pay auctions, where bidders pay irrespective of whether they win. We introduce a general class of all‐pay auctions, rank their revenues, and illustrate how they dominate lotteries and winner‐pay formats. The optimal fund‐raising mechanism is an all‐pay auction augmented with an entry fee and reserve price.

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