Overdissipation and Convergence in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules

29 Pages Posted: 3 May 2012

See all articles by Subhasish M. Chowdhury

Subhasish M. Chowdhury

University of Bath - Department of Economics

Roman M. Sheremeta

Case Western Reserve University

Theodore Turocy

University of East Anglia (UEA)

Date Written: May 2, 2012

Abstract

We study experimentally the effects of cost structure and prize allocation rules on the performance of rent-seeking contests. Most previous studies use a lottery prize rule and linear cost, and find both overdissipation relative to Nash equilibrium prediction and significant variation in individual subject efforts. In a 2 x 2 design, we investigate the effects of sharing the prize proportionally and of a convex cost function, while holding fixed the Nash equilibrium prediction for effort. We find that the share rule results in average effort closer to the Nash prediction, lower variation in individual efforts, and convergence of the distribution of individual efforts towards Nash over time. Combining the share rule with a convex cost function further enhances these results. Our findings indicate that a significant amount of subjects’ non-equilibrium behavior in contests can be explained by features of the experimental design. These results contribute towards design guidelines for contests based on behavioral principles that take into account contest features that may not affect the Nash equilibrium prediction. These lessons suggest design guidelines for future experiments on contests.

Keywords: rent-seeking, contest, contest design, experiments, quantal response, over-dissipation

JEL Classification: C72, C91, D72

Suggested Citation

Chowdhury, Subhasish M. and Sheremeta, Roman M. and Turocy, Theodore, Overdissipation and Convergence in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules (May 2, 2012). Available at SSRN: https://ssrn.com/abstract=2050545 or http://dx.doi.org/10.2139/ssrn.2050545

Subhasish M. Chowdhury

University of Bath - Department of Economics ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://https://sites.google.com/site/subhasishmc/

Roman M. Sheremeta (Contact Author)

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

Theodore Turocy

University of East Anglia (UEA) ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

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