Reimbursement in contests with bilateral delegation

Abstract

We study two-player contests in which each player first hires a delegate to expend effort on her behalf, and then the delegates choose their effort levels simultaneously. The losing player pays the winning player reimbursement for part of the effort (cost) that the winning delegate expended. We find that each player offers her delegate greater compensation (in the case of winning) in the model with reimbursement than in the model without reimbursement. The equilibrium expected payoffs for the delegates [players] are greater [smaller] in the model with reimbursement than in the model without reimbursement. As the reimbursement rate increases, each player offers her delegate greater compensation (in the case of winning), economic rent for each delegate increases, and each player is worse off.