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Overbidding and Heterogeneous Behavior in Contest Experiments

  • Roman M. Sheremeta

    ()

    (Argyros School of Business and Economics, Chapman University)

We provide an overview of experimental literature on contests and point out the two main phenomena observed in most contest experiments- (i) overbidding relative to the standard Nash equilibrium prediction and (ii) heterogeneous behavior of ex-ante symmetric contestants. Based on the sample of contest experiments that we review, the median overbidding rate is 72%. We provide different explanations for the overbidding phenomenon, including bounded rationality, utility of winning, other-regarding preferences, probability distortion, and the shape of the payoff function. We also provide explanations for heterogeneous behavior of contestants based on differences in preferences towards winning, inequality, risk and losses, and demographic differences. Furthermore, we suggest mechanisms that can reduce overbidding and induce more homogeneous behavior. Finally, we discuss directions for future research.

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Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 13-06.

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Length: 48 pages
Date of creation: 2013
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Handle: RePEc:chu:wpaper:13-06
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