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

Author

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  • 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)

Abstract

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.

Suggested Citation

  • Subhasish M. Chowdhury & Roman M. Sheremeta & Theodore L. Turocy, 2012. "Overdissipation and Convergence in Rent-seeking Experiments: Cost structure and prize allocation rules," Working Papers 12-13, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:12-13
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Lim, Wooyoung & Matros, Alexander & Turocy, Theodore L., 2014. "Bounded rationality and group size in Tullock contests: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 155-167.
    2. 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.
    3. Roman M. Sheremeta, 2013. "Overbidding And Heterogeneous Behavior In Contest Experiments," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 491-514, July.
    4. David Kelsey & Tigran Melkonyan, 2014. "Contests with Ambiguity," Discussion Papers 1411, Exeter University, Department of Economics.
    5. Fallucchi, Francesco & Renner, Elke & Sefton, Martin, 2013. "Information feedback and contest structure in rent-seeking games," European Economic Review, Elsevier, vol. 64(C), pages 223-240.
    6. Magnus Hoffmann & Martin Kolmar, 2013. "Distributional Preferences in Probabilistic and Share Contests," CESifo Working Paper Series 4184, CESifo Group Munich.
    7. Shupp, Robert & Sheremeta, Roman M. & Schmidt, David & Walker, James, 2013. "Resource allocation contests: Experimental evidence," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 257-267.
    8. Dutcher, E. Glenn & Balafoutas, Loukas & Lindner, Florian & Ryvkin, Dmitry & Sutter, Matthias, 2015. "Strive to be first or avoid being last: An experiment on relative performance incentives," Games and Economic Behavior, Elsevier, vol. 94(C), pages 39-56.
    9. Philip Brookins & Dmitry Ryvkin, 2014. "An experimental study of bidding in contests of incomplete information," Experimental Economics, Springer;Economic Science Association, vol. 17(2), pages 245-261, June.
    10. Erik O. Kimbrough & Roman M. Sheremeta, 2012. "Why Can’t We Be Friends? Entitlements, bargaining, and conflict," Working Papers 12-16, Chapman University, Economic Science Institute.
    11. repec:uea:wcbess:13-11 is not listed on IDEAS

    More about this item

    Keywords

    rent-seeking; contest; contest design; experiments; quantal response; over-dissipation;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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