Endogenous interdependent preferences in a dynamical contest model

Abstract

Outcomes observed in laboratory experiments on contests are often not consistent with the results expected by theoretical models, with phenomena that frequently occur like overbidding or persisting oscillations in strategic choices. Several explanations have been suggested to understand such phenomena, dealing primarily with equilibrium analysis. We propose a dynamical model based on the coevolution of strategic choices and agent preferences. Each agent can have non-self-interested preferences, which influence strategic choices and in turn evolve according to them. We show that multiple coexisting steady states characterized by non-self-interested preferences can exist, and they lose stability as the price increases, leading to endogenous oscillating dynamics. Finally, with an emphasis on two specific kinds of agents, we explain how overbidding can emerge. The numerical results show a good qualitative agreement with the experimental data.

Keywords: Contest models, Endogenous interdependent preferences, Coevolution of strategies and preferences, Multistability, Non convergent dynamics