The Role of Budget Constraints in Sequential Elimination Tournaments

Motivated by the EU concept of Pre-Commercial Procurement and the massive presence of SMEs in the European economy, we study how budget constraints affect R&D effort in sequential elimination tournaments. We show that introducing budget constraints leads to a non-monotonicity in unconstrained contestants’ effort. Furthermore, we show that if the budget asymmetry is not too large, unconstrained contestants exert higher effort than when faced with unconstrained contestants only.