Please explain Tullock's lottery

Expert Solution

Tullock's lottery is the most straightened form of all-pay auction in which everyone submits a bid but losers and winners pay their submitted bids.

(An all pay auction is an auction in which every bidder must pay regardless of whether they win the prize, which is awarded to the highest bidder as in conventional auction.)

This method is also instrumental in understanding many ideas in public choice economics.

Tullock's lottery can be explained through the following example:

Tullock says that lobbying is like a lottery are those who buy tickets to this lottery are interest organisations. Assume that the prize is a government contract to build a highway and the contract will create a $100 profit to the winning firm. Firms can buy as many lottery tickets as they like.

Assume that ticket cost $10 and there are only two firms competing for the contract (buying tickets). Firm A buys two tickets and firm B buys four tickets.

In this situation, Firm A has 0.33 (2/6) and firm B has 0.667 (4/6) probability of holding the winning ticket. Given that the contract is worth $100, each firm is behaving rationally. However, if more firms enter in the contest, the probability of winning of both firms will decline.

Now, the paradox in Tullock's lottery is that if one firm buys the ticket, the other firms will also buy the ticket. Ultimately, the total expenditure firms make will exceed the price of the lottery.

This is the basic idea behind the model of Tullock's lottery.

Rahul Sunny answered 7 months ago

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