Information Disclosure in Contests With Endogenous Entry: An Experiment

Abstract

We use a laboratory experiment to study the effects of disclosing the number of active participants in contests with endogenous entry. At the first stage potential participants decide whether to enter competition, and at the second stage entrants choose their investments. In a 2×2 design, we manipulate the size of the outside option, ω, and whether or not the number of entrants is disclosed between the stages. Theory predicts more entry for lower ω, and the levels of entry and aggregate investment to be independent of disclosure in all cases. We find empirical entry frequencies decreasing with ω. For aggregate investment, we find no effect of disclosure when ω is low, but a strong positive effect of disclosure when ω is high. The difference is driven by substantial overbidding in contests with a small, publicly known number of players, contrasted by more restrained bidding in contests where the number of players is uncertain and may be small. The behavior under disclosure is explained by a combination of joy of winning and entry regret.

Keywords: contest, endogenous entry, information disclosure, experiment

JEL Classification: C72, C92, D82