Showing Off or Laying Low? The Economics of Psych-Outs

Tinbergen Institute Discussion Paper 2018-041/VII

44 Pages Posted: 10 May 2018

See all articles by Philipp Denter

Philipp Denter

Universidad Carlos III de Madrid

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

Dana Sisak

Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute

Date Written: April 25, 2018

Abstract

We study situations where a new entrant with privately known talent competes with an incumbent whose talent is common knowledge. Competition takes the form of a rank-order tournament. Prior to the competition, the newbie can "show off," i.e., send a talent revealing costly signal. We find that incentives to show off can go in either direction --- more talented types may wish to mimic less talented ones or the reverse, depending on the newbie's talent distribution compared to the one of the incumbent. In equilibrium though, showing off occurs only when the newbie is exceptionally talented compared to the incumbent. Surprisingly, showing off occurs to the benefit of both parties; the newbie benefits for obvious reasons, the incumbent by economizing on wasted effort when overmatched. We use our findings to study the broader consequences of showing off, which is discouraged in many cultures through implicit social norms. We show that norms against showing off raise total effort but worsen talent selection, and are thus appropriate only when effort is society's main concern.

Keywords: Showing Off, Contests, Norms

JEL Classification: D23, D83, M52

Suggested Citation

Denter, Philipp and Morgan, John and Sisak, Dana, Showing Off or Laying Low? The Economics of Psych-Outs (April 25, 2018). Tinbergen Institute Discussion Paper 2018-041/VII. Available at SSRN: https://ssrn.com/abstract=3168465 or http://dx.doi.org/10.2139/ssrn.3168465

Philipp Denter (Contact Author)

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

Dana Sisak

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
46
Abstract Views
248
PlumX Metrics