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

  • 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)

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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File URL: http://www.chapman.edu/research-and-institutions/economic-science-institute/_files/WorkingPapers/Sheremeta-Chowdhury-Turocy-OverdissipationandConvergence.pdf
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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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  17. 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.
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