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Contests and Negotiation Between Hubristic Players

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Abstract

Why do contests exist in settings where negotiation provides a costless alternative? I assess a new explanation: parties may be overconfident about their ability or optimistic about their chances of winning. For both parties in a contest, this hubris: (i) reduces the incentive to exit the contest; (ii) reduces effort; and (iii) increases expected payoffs. Whilst hubris leads to the contest being preferred to costless negotiation, the welfare loss is nonmonotonic in either behavioural bias.

Suggested Citation

  • Long, Iain W, 2019. "Contests and Negotiation Between Hubristic Players," Cardiff Economics Working Papers E2019/17, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2019/17
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    References listed on IDEAS

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    1. Long, Iain W., 2015. "Better feared than loved: Reputations and the motives for conflict," Journal of Economic Behavior & Organization, Elsevier, vol. 114(C), pages 46-61.
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    6. Eyal Baharad & Shmuel Nitzan, 2008. "Contest Efforts in Light of Behavioural Considerations," Economic Journal, Royal Economic Society, vol. 118(533), pages 2047-2059, November.
    7. Helmut Bester & Karl Wärneryd, 2006. "Conflict and the Social Contract," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(2), pages 231-249, July.
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    More about this item

    Keywords

    Contests; Optimism bias; Overconfidence bias; Negotiation;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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