I. Introduction
Tournaments, conflict, patent races and rent seeking have been modeled as contests in
which participants exert efforts to increase their probability of winning a prize. A
significant element in such contests is the function that provides each player’s
probability of winning for any given combination of the efforts made by the
contestants, the so called contest success function (CSF). In the literature specific
CSF’s have been employed without any particular reason other than analytical
convenience. Skaperdas (1996) provided a rationale for employing a particular CSF
by axiomatizing the general class of additive CSF’s. A large class of contests has thus
been rationalized. In most studies of contests, however, the source of the prize or,
more generally, the source of the contestants’ prize valuations has been ignored.
Despite the fact that in some studies the source of the prize system has been based on
the existence of monopoly profits (rents) or various forms of protective trade-
policies, Mueller (2002), the general role of public policy as a determinant of the
contest prize system was not adequately studied. The main objective of this paper is
to fill this gap.
Our argument is that quite often the prize system is determined by government
intervention that takes the form of a policy proposal that constitutes an alternative to
an existing status-quo policy. The possible ‘prizes’ or stakes of the affected interest
groups are equal to the differences in the payoffs corresponding to the status-quo and
the proposed policy reform. Whether the proposed policy is implemented or not
depends on the outcome of a political contest in which these groups exert efforts to
increase the probability that their preferred policy, the existing policy or the proposed
policy, is the outcome of the contest. The existing status-quo policy is the realized
contest outcome if the proposed policy is rejected. The alternative proposed policy is
the implemented contest outcome if the proposed policy is approved. Typically,
therefore, in a two-player contest one interest group supports the rejection of the
proposed policy because it prefers the status-quo policy while the other interest group
supports the approval of the alternative proposed policy. For example, a tax reform
may be supported by one industry and opposed by another. Existing pollution
standards may be defended by the industry and challenged by an environmentalist
interest group. A monopoly can face the opposition of a customers coalition fighting