Identity-dependent externalities can mitigate overbidding in Tullock contests: Theory and evidence

We investigate how identity-dependent externalities infuence bidding behavior in Tullock lottery contests. While experimental studies of standard contests, in which losers are indiferent to the winner’s identity, consistently document overbidding, the role of identity-dependent preferences remains less explored. We address this gap by frst showing that the class of three-player Tullock lottery contests with identity-dependent externalities considered here can be mapped into a standard Tullock lottery contest with appropriately chosen prize valuations and endowments, yielding identical Nash equilibrium predictions. We then use this mapping to design a laboratory experiment that directly compares the two “equilibrium-equivalent†contest formats. In our three-player experimental setting, two subjects are assigned higher competitive stakes (type H) and one lower competitive stakes (type L). Despite identical equilibrium predictions, behavior difers across environments. Type H subjects bid close to equilibrium in the identity-dependent externalities treatments but overbid in the standard treatments, while type L subjects overbid in both formats. Furthermore, aggregate overbidding is robust in the standard treatments, whereas aggregate bids in the identity-dependent externalities treatments are not statistically diferent from the Nash benchmarks. These results suggest that identity-dependent externalities can attenuate overbidding.