Bid Caps in Noisy Contests

Abstract

This paper studies optimal bid caps in a multiplayer noisy contest in which a higher bid does not guarantee a sure win. The bid cap can be either rigid or flexible. The former imposes outright bidding restrictions on players’ bids, while the latter taxes bids. A designer structures the bid cap to maximize a weighted sum between aggregate bid and tax revenue. Our analysis characterizes the optimum. A rigid bid is always outperformed by flexible ones, and a laissez-faire policy—i.e., no cap—is optimal when the designer maximizes the aggregate bid. The results also generate novel practical implications. (JEL C72, D44, D82)