A Rent Seeking Experiment with Leakage from the Contest Success Function

We contribute to the growing experimental literature on rent seeking contests that examines the effect of the prize structure on expenditures. We test the predictive power of a model (Godwin et al., 2006) that includes realistic features of actual political rent seeking contests that alter the contest success function. In this paper, we focus on a shift parameter in the contest success function, which Godwin et al. (2006) describe in a political context as policymaker costs. In practice, an increase in this shift parameter results in a decrease in the probability of a player winning the prize, ceteris paribus. The inclusion of this parameter makes it possible for no prize to be awarded in the contest. The model also allows for multiple prizes to be awarded, as well as the possibility of a single prize. Consistent with the existing literature on rent seeking, we find significant overspending relative to the Nash prediction. However, the inclusion of the probability shift parameter significantly reduces the amount of this overspending. Thus, the “policymaker cost” is associated with a reduction in the amount of inefficient rent dissipation; this result holds even after controlling for the level of competition and subject characteristics.