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Goeree, J., Maasland, E., Onderstal, A., and Turner, J. (2005). How (not) to raise money. Journal of Political Economy, 113(4):897-918.


  • Journal
    Journal of Political Economy

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.