RESOURCE ALLOCATION BY CONTEST OR BARGAINING

摘要

We consider resource allocation between two players through contest or Nash bargaining, assuming that player 2's contest effort or resource use exerts an externality on player 1. A sequential move contest where the effectively lowest valuation player(the underdog) moves first maximises individual and thus also sum of payoffs. The interests of regulator and players are thus aligned. In Nash bargaining between the players, a threat point of no allocation produces the highest sum of payoffs. Then the externality source fully gets the cost (benefit) of a negative (positive) externality. If contest outcomes are used as bargaining threat points, the highest sum of payoffs is for the favourite-moves-first contest. That contest, however, gives lower sum ofpayoffs as a contest, and is thus not immediately credible as threat point. If the regulator can commit to play the contest the players jointly recommend, or have as threat point to bargaining the contest the players jointly promote, sum of payoffs fromcontests and from Nash bargaining can be maximised, even if the regulator does not have full information about valuation and externality. It requires that the players have sufficient information to know who is favourite and who is underdog.