Alex Ellifritz

Professor Martin

Freshman Seminar

November 16, 2016

Comment 3

Charities will often organize raffles or auctions to raise money. A report came out recently showing that charity events raised over $240 million in the US in every year since 2003. Onderstal Schram is the first to perform an experimental investigation where the prize to be won is characterized by independent private values where there is incomplete information about others’ values. Their study compares winner-pay (first-price) auctions, lotteries and all-pay (first-price) auctions. Their main result provides support for the theoretical predictions: all-pay auctions are the preferred mechanism to raise money for charities. The results show that compared to all-pay auctions, winner-pay auctions are expected to reduce revenues by more than 100 and lotteries by almost 50. For example, on June 24, 1999, Eric Clapton's legendary 1956 Fender Stratocaster ‘Brownie’ guitar raised $497,500 for the ‘Crossroads Centre’ in a winner pay auction. In Schram’s estimates, he indicates that the proceeds of this one guitar could have been at least $100,000 higher, had an all-pay format been used. This shows why the all-pay format auction is the best choice for a charity trying to raise the most amount of money possible.