All-Pay Auctions with Negative Prize Externalities: Theory and Experimental Evidence

32 Pages Posted: 28 Oct 2008

See all articles by Dario Sacco

Dario Sacco

University of Zurich

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: May 1, 2008

Abstract

Abstract: The paper characterizes the mixed-strategy equilibria in all-pay auctions with endogenous prizes that depend positively on own effort and negatively on the effort of competitors. Such auctions arise naturally in the context of investment games, lobbying games, and promotion tournaments. We also provide an experimental analysis of a special case which captures the strategic situation of a two-stage game with investment preceding homogenous Bertrand competition. We obtain overinvestment both relative to the mixed-strategy equilibrium and the social optimum.

Keywords: Keywords: All-pay auctions, oligopoly, investment, experiment, overbidding

JEL Classification: JEL Classification: C92, D44, L13, O31

Suggested Citation

Sacco, Dario and Schmutzler, Armin, All-Pay Auctions with Negative Prize Externalities: Theory and Experimental Evidence (May 1, 2008). Available at SSRN: https://ssrn.com/abstract=1291085 or http://dx.doi.org/10.2139/ssrn.1291085

Dario Sacco

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Armin Schmutzler (Contact Author)

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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