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Competitive Burnout: Theory and Experimental Evidence

Listed author(s):
  • J. Atsu Amegashie

    ()

    (Department of Economics, University of Guelph)

  • C. Bram Cadsby

    ()

    (Department of Economics, University of Guelph)

  • Yang Song

    ()

We examine equilibrium selection in a two-stage sequential elimination contest in which contestants compete for a single prize. This game has a continuum of equilibria, only one of which satisfies the Coalition-Proof Nash Equilibrium (CPNE) refinement. That equilibrium involves “burning out” by using all of one’s resources in the first stage. It is Pareto-dominated by many other equilibria. We find that CPNE predicts well when four people compete, but not when eight people compete for two second-stage spots. Using a cognitive hierarchy (CH) framework, we show that when the number of players and the mean number of thinking steps are large, the CH prediction involves burning out. This provides a partial explanation of our results. We also develop a formal argument as to why CPNE logic is more compelling with more players. We conclude that more competition leads to higher bids, and that burning out is indeed a competitive phenonemon.

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Paper provided by University of Guelph, Department of Economics and Finance in its series Working Papers with number 0507.

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Length: 54 pages
Date of creation: 2005
Handle: RePEc:gue:guelph:2005-7
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Guelph, Ontario, N1G 2W1

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Web page: https://www.uoguelph.ca/economics/

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