We study with the help of experiments a two-player second-price all-pay auction. Such an auction describes e.g. the situation of a country were stabilisations are achieved through tax increases that eliminate a budget deficit. If these tax increases have distributional implications then stabilisation may be delayed (Alesina and Drazen, 1991). We find (1) under-dissipation and not over-dissipation of rents which is in contrast to other all-pay auction experiments. (2) Underdissipation decreases with increasing cost of distortionary taxation and increases with bidding cost. (3) Bidding is closer to the equilibrium on the individual than on the aggregate level. (4) The speed of stabilisations is smaller than the risk neutral Bayesian equilibrium and reacts less sensitively to changes in the cost of distortionary taxation.
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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number
04-06.
Length: 22 pages Date of creation: 05 Mar 2004 Date of revision: Handle: RePEc:xrs:sfbmaa:04-06
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