Can Groups Solve the Problem of Over-Bidding in Contests?

29 Pages Posted: 8 Feb 2011

See all articles by Roman M. Sheremeta

Roman M. Sheremeta

Case Western Reserve University

Jingjing Zhang

University of Zurich - Department of Economics

Date Written: September 10, 2009

Abstract

This study reports an experiment that examines whether groups can better comply with theoretical predictions than individuals in contests. Our experiment replicates previous findings that individual players significantly overbid relative to theoretical predictions, incurring substantial losses. There is high variance in individual bids and strong heterogeneity across individual players. The new findings of our experiment are that groups make 25% lower bids, their bids have lower variance, and group bids are less heterogeneous than individual bids. Therefore, groups receive significantly higher and more homogeneous payoffs than individuals. We elicit individual and group preferences towards risk using simple lotteries. The results indicate that groups make less risky decisions, which is a possible explanation for lower bids in contests. Most importantly, we find that groups learn to make lower bids from communication and negotiation between group members.

Keywords: rent-seeking, contest, experiments, risk, over-dissipation, group decision-making

JEL Classification: C72, C91, C92, D72

Suggested Citation

Sheremeta, Roman M. and Zhang, Jingjing, Can Groups Solve the Problem of Over-Bidding in Contests? (September 10, 2009). Available at SSRN: https://ssrn.com/abstract=1755607 or http://dx.doi.org/10.2139/ssrn.1755607

Roman M. Sheremeta (Contact Author)

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

Jingjing Zhang

University of Zurich - Department of Economics ( email )

Blümlisalpstrasse 10
Zurich, 8006
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/zhang.html

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