Overbidding and Overspreading in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules

32 Pages Posted: 13 May 2014

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 12, 2014

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 overbidding relative to the Nash equilibrium prediction and significant variation of efforts, which we term ‘overspreading.’ We investigate the effects of allocating the prize by a lottery versus sharing it proportionally, and of convex versus linear costs of effort, while holding fixed the Nash equilibrium prediction for effort. We find the share rule results in average effort closer to the Nash prediction, and lower variation of effort. Combining the share rule with a convex cost function further enhances these results. We can explain a significant amount of non-equilibrium behavior by features of the experimental design. These results contribute towards design guidelines for contests based on behavioral principles that take into account implementation features of a contest.

Keywords: rent-seeking, contest, contest design, experiments, quantal response, overbidding

JEL Classification: C72, C91, D72

Suggested Citation

Chowdhury, Subhasish M. and Sheremeta, Roman M. and Turocy, Theodore, Overbidding and Overspreading in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules (May 12, 2014). Games and Economic Behavior, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2436018 or http://dx.doi.org/10.2139/ssrn.2436018

Subhasish M. Chowdhury (Contact Author)

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

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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