Property rights and loss aversion in contests

We analyze the effects of property rights and the resulting loss aversion on contest outcomes. We study three treatments: in ‘gain’ two players start with no prize and make sunk bids to win a prize; whereas in ‘loss’ both the subjects start with prizes and whoever loses the contest loses their prize. Finally, in ‘mixed’ one player starts with a prize, which stays with him if he wins but is transferred to the rival otherwise. Since the differences among the treatments arise only from framing, the expected utility or the standard loss aversion models predict no difference in bids across treatments. We introduce a new model with loss aversion in which the property rights are made salient. This model predicts average bids in descending order in the loss, the mixed, and the gain treatment; and higher bids by the player with property rights in the mixed treatment. The results from a laboratory experiment broadly support these predictions. In the laboratory, no significant difference is found in bids in the loss (gain) treatment versus bids by property rights holder (non-holder) in the mixed treatment. A model incorporating both loss aversion and social preference explains this result.