Media Briefings

Lotteries Are The Most Effective ‘Prize Mechanism’ For Getting People To Contribute To Public Projects

  • Published Date: September 2010

Offering a prize for contributions to a new project that benefits a whole community raises more funds (net of the cost of the prize) than simply relying on voluntary contributions. Perhaps surprisingly, the most effective prize mechanism is a lottery, in which each participant receives tickets in proportion to their contribution and the winning ticket is randomly selected.

These are among the findings of research by Luca Corazzini, Marco Faravelli and Luca Stanca, published in the September 2010 Economic Journal. Their experimental study suggests that the lottery raises significantly more funds than an ‘all-pay auction’, in which the participant who contributes the most wins the prize. They believe that this is because people tend to prefer a less competitive mechanism where even small contributions give the donor a chance of winning the prize.

The study explores a key issue in public economics: how to solve a social dilemma by designing an appropriate incentive scheme. More specifically, it investigates how to finance a public good through prize-based mechanisms.

Consider the following example. You are the head of the local school. You want to implement an extra-curricular project that will involve all the pupils in your school. The project has educational returns for the pupils that far exceed its costs. But the school has no funds to finance it. How can you raise funds to finance the project?

Having each family pay for an equal share of the project’s costs is not an option, since parents cannot be forced to pay for the project. Making the project available only to those who pay for it is not possible either, as you cannot exclude individual children from it.

Alternatively, you could rely on voluntary contributions: all pupils participate in the project, and each parent freely decides if and how much to contribute to the school project. Unfortunately, voluntary contributions are unlikely to be sufficient to finance the project, given the incentive to ‘free-ride’associated with public goods: those who do not pay for the project can still benefit from it.

Beyond this example, any charity, fundraiser or civic group without the coercive power to enforce taxes faces the same social dilemma: a project (the public good) that would be overall beneficial (socially efficient) will not be implemented because, individually, no one has an incentive to contribute to its funding.

There are several possible ways of overcoming this problem. This study focuses on using a monetary prize to incentivise contributions to the public good. The researchers investigate the performance of two prize-based mechanisms: a lottery and an all-pay auction.

In the lottery, each participant receives tickets in proportion to their contribution; one ticket is randomly selected and the holder wins the prize. In the all-pay auction, the participant who contributes the most wins the prize.

The researchers explore the theoretical properties of these two mechanisms and analyse them empirically through a laboratory experiment designed to test three main predictions:

  • First, incentive-based mechanisms should outperform the voluntary contribution mechanism, net of the cost of the prize.
  • Second, the total revenue of an all-pay auction should be higher than that of a lottery with an equal prize.
  • Third, absolute contributions should not depend on income in the lottery, whereas they should rise with income in the all-pay auction.

The study finds that, as predicted, both the lottery and the all-pay auction perform better than voluntary contribution in terms of public good provision, net of the cost of the prize. But contrary to the predictions, contributions are significantly higher in the lottery than in the all-pay auction.

The authors’ interpretation of these results is based on the idea that people’s concerns for social efficiency tend to be crowded out by a higher degree of competition. This explains why the all-pay auction is outperformed by the lottery, a less competitive mechanism where even small contributions give a chance of winning the prize. The stronger competition in the all-pay auction reduces each individual’s concern for the payoff of others.

The researchers develop a model of ‘other-regarding’ preferences that takes account of the effect of competition on people’s concerns for social efficiency. This model explains not only the experimental findings, but also the results of several closely related experiments that the self-interested homo economicus paradigm fails to predict.

More generally, to design an appropriate incentive scheme, when other-regarding preferences might play a role, it is essential to take account of how that mechanism may affect people’s preferences.

ENDS

Notes for editors: ‘A Prize to Give for: An Experiment on Public Good Funding Mechanisms’ by Luca Corazzini, Marco Faravelli and Luca Stanca is published in the September 2010 issue of the Economic Journal.

Luca Corazzini is at Bocconi University in Milan. Marco Faravelli is at the University of Queensland in Brisbane. Luca Stanca is the University of Milan Bicocca.

For further information: contact Marco Faravelli on +44-7980-307094 (email: m.faravelli@uq.edu.au); or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com).