Groh, Christian Moldovanu, Benny Sela, Aner Sunde, Uwe
Year of Publication:
SFB/TR 15 Discussion Paper No. 140
Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY), München
We study an elimination tournament with heterogenous contestants whose ability is common-knowledge. Each pair-wise match is modeled as an all-pay auction where the winner gets the right to compete at the next round. Equilibrium efforts are in mixed strategies, yielding rather complex play dynamics: the endogenous win probabilities in each match depend on the outcome of other matches through the identity of the expected opponent in the next round. The designer can seed the competitors according to their ranks. For tournaments with four players we find optimal seedings with respect to three different criteria: 1) maximization of total effort in the tournament; 2) maximization of the probability of a final among the two top ranked teams; 3) maximization of the win probability for the top player. In addition, we find the seedings ensuring that higher ranked players have a higher probability to win the tournament. Finally, we compare the theoretical predictions with data from NCAA basketball tournaments.