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Overdissipation and Convergence in Rent-seeking Experiments: Cost structure and prize allocation rules

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Author Info

  • Subhasish M. Chowdhury

    ()
    (School of Economics, and Centre for Behavioural and Experimental Social Science, University of East Anglia, Norwich)

  • Roman M. Sheremeta

    (Argyros School of Business and Economics, Chapman University, USA)

  • Theodore L. Turocy

    (School of Economics, and Centre for Behavioural and Experimental Social Science, University of East Anglia, Norwich)

Abstract

We study experimentally the effects of cost structure and prize allocation rules on the performance of rent-seeking contests. Most previous studies use a lottery prize rule and linear cost, and find both overdissipation relative to Nash equilibrium prediction and significant variation in individual subject efforts. In a 2  2 design, we investigate the effects of sharing the prize proportionally and of a convex cost function, while holding fixed the Nash equilibrium prediction for effort. We find that the share rule results in average effort closer to the Nash prediction, lower variation in individual efforts, and convergence of the distribution of individual efforts towards Nash over time. Combining the share rule with a convex cost function further enhances these results. Our findings indicate that a significant amount of subjects’ non-equilibrium behavior in contests can be explained by features of the experimental design. These results contribute towards design guidelines for contests based on behavioral principles that take into account contest features that may not affect the Nash equilibrium prediction. These lessons suggest design guidelines for future experiments on contests.

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Bibliographic Info

Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 12-13.

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Length: 34 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:chu:wpaper:12-13

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Keywords: rent-seeking; contest; contest design; experiments; quantal response; over-dissipation;

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References

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  1. Sheremeta, Roman & Zhang, Jingjing, 2009. "Can Groups Solve the Problem of Over-Bidding in Contests?," MPRA Paper 49885, University Library of Munich, Germany.
  2. Shakun D. Mago & Anya C. Savikhin & Roman M. Sheremeta, 2012. "Facing Your Opponents: Social identification and information feedback in contests," Working Papers 12-15, Chapman University, Economic Science Institute.
  3. Skaperdas, Stergios & Gan, Li, 1995. "Risk Aversion in Contests," Economic Journal, Royal Economic Society, vol. 105(431), pages 951-62, July.
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  5. Roman M. Sheremeta, 2009. "Expenditures and Information Disclosure in Two- Stage Political Contests," Working Papers 09-10, Chapman University, Economic Science Institute.
  6. Shupp, Robert & Sheremeta, Roman M. & Schmidt, David & Walker, James, 2013. "Resource allocation contests: Experimental evidence," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 257-267.
  7. Szidarovszky, Ferenc & Okuguchi, Koji, 1997. "On the Existence and Uniqueness of Pure Nash Equilibrium in Rent-Seeking Games," Games and Economic Behavior, Elsevier, vol. 18(1), pages 135-140, January.
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  14. Sheremeta, Roman, 2009. "Contest Design: An Experimental Investigation," MPRA Paper 52101, University Library of Munich, Germany.
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  21. Sheremeta, Roman, 2009. "Experimental Comparison of Multi-Stage and One-Stage Contests," MPRA Paper 49884, University Library of Munich, Germany.
  22. Wilcox, Nathaniel, 2007. "Stochastically more risk averse: A contextual theory of stochastic discrete choice under risk," MPRA Paper 11851, University Library of Munich, Germany.
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  24. Dechenaux, Emmanuel & Kovenock, Dan & Sheremeta, Roman M., 2012. "A survey of experimental research on contests, all-pay auctions and tournaments," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2012-109, Social Science Research Center Berlin (WZB).
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Citations

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Cited by:
  1. Roman M. Sheremeta, 2013. "Overbidding and Heterogeneous Behavior in Contest Experiments," Working Papers 13-06, Chapman University, Economic Science Institute.
  2. Shupp, Robert & Sheremeta, Roman, 2013. "Resource Allocation Contests: Experimental Evidence," MPRA Paper 49889, University Library of Munich, Germany.
  3. Francesco Fallucchi & Elke Renner & Martin Sefton, 2013. "Information feedback and contest structure in rent-seeking games," Discussion Papers 2013-02, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  4. Shakun D. Mago & Anya C. Savikhin & Roman M. Sheremeta, 2012. "Facing Your Opponents: Social identification and information feedback in contests," Working Papers 12-15, Chapman University, Economic Science Institute.
  5. Erik O. Kimbrough & Roman M. Sheremeta, 2012. "Why Can’t We Be Friends? Entitlements, bargaining, and conflict," Working Papers 12-16, Chapman University, Economic Science Institute.
  6. Magnus Hoffmann & Martin Kolmar, 2013. "Distributional Preferences in Probabilistic and Share Contests," CESifo Working Paper Series 4184, CESifo Group Munich.

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