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Caps on bids in all-pay contests with identity-dependent externalities

Author

Listed:
  • Kovenock, Dan
  • Song, Jian
  • Trevisan, Francesco

Abstract

This article examines, both theoretically and experimentally, the welfare implications of implementing symmetric bid caps in lobbying competitions. We model lobbying games as lottery contests with two radicals and one centrist, where all players strictly prefer to win. However, if they lose, radicals prefer to lose to a centrist rather than to the opposing radical. We establish the existence and uniqueness of equilibrium and find that, in the absence of a bid cap, radicals may bid aggressively enough to drive the centrist out of the competition, thereby preventing the social welfare-maximizing outcome. Consequently, implementing a bid cap enhances social welfare in two ways: it reduces aggregate expenditure and increases the likelihood of the centrist winning. Our experimental results qualitatively align with the theoretical predictions. However, we also identify and address notable behavioral patterns: in contrast to the vast experimental literature (Sheremeta, 2013) on contests, aggregate bids do not exceed theoretical predictions in all treatments.

Suggested Citation

  • Kovenock, Dan & Song, Jian & Trevisan, Francesco, 2026. "Caps on bids in all-pay contests with identity-dependent externalities," Games and Economic Behavior, Elsevier, vol. 158(C), pages 691-716.
    • Handle: RePEc:eee:gamebe:v:158:y:2026:i:c:p:691-716
    DOI: 10.1016/j.geb.2026.05.003
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    Keywords

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    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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