Overbidding and Heterogeneous Behavior in Contest Experiments
42 Pages Posted: 7 Jan 2013 Last revised: 6 Feb 2013
Date Written: January 25, 2013
We provide an overview of experimental literature on lottery contests and point out the two main phenomena observed in most contest experiments: overbidding relative to the standard Nash equilibrium prediction and heterogeneous behavior of ex-ante symmetric contestants. Based on the sample of contest experiments that we review, the median overbidding rate is 72%. We provide different explanations for the overbidding phenomenon, including bounded rationality, utility of winning, other-regarding preferences, probability distortion, and the shape of the payoff function. We also provide explanations for heterogeneous behavior of contestants based on differences in preferences towards winning, inequality, risk and losses, and demographic differences. Furthermore, we suggest mechanisms that can reduce overbidding and induce more homogeneous behavior. Finally, we discuss directions for future research.
Keywords: experiments, contests, overbidding, heterogeneous behavior
JEL Classification: C72, C91, C92, D72, D74
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