Sequential Contests with Incomplete Information: Theory and Experimental Evidence

38 Pages Posted: 15 Oct 2022

See all articles by Philip Brookins

Philip Brookins

University of South Carolina

Alexander Matros

Moore School of Business

Foteini Tzachrista

University of Illinois at Chicago

Date Written: October 3, 2022

Abstract

In this paper, we investigate behavior in two-player sequential-move contests with complete and incomplete information about the value of the prize, theoretically and experimentally. First, we describe a Bayesian equilibrium of a sequential contest in which both players have private prize values. Then, we test our predictions in the experimental laboratory. We analyze three settings: symmetric prize valuations with complete information, asymmetric prize valuations with complete information, and asymmetric prize valuations with incomplete information. In all settings, and regardless of the order of moves, we find that subjects' behavior is less consistent with theory and more in line with simple mental shortcuts. The decision of the first-mover is relatively more complex than that of the second-mover. Our data supports a simple investment heuristic: first-movers invest half of their own valuation. The decision environment is free of strategic uncertainty and ambiguity for second-movers, and hence, they can condition their investment directly on the investment of first-movers. Regardless of valuation, second-movers invest frequently in one of the following ways: drop out of the contest, i.e., bid sufficiently close to zero, or invest at or just above the first-movers' investment. We add to the growing literature by showing that experimental contest data can be better explained by simple heuristics, rather than equilibrium predictions.

Keywords: contest, sequential moves, heterogeneity, incomplete information, investment heuristic

JEL Classification: C72, C91, C99, D82, D91

Suggested Citation

Brookins, Philip and Matros, Alexander and Tzachrista, Foteini, Sequential Contests with Incomplete Information: Theory and Experimental Evidence (October 3, 2022). Available at SSRN: https://ssrn.com/abstract=4236371 or http://dx.doi.org/10.2139/ssrn.4236371

Philip Brookins (Contact Author)

University of South Carolina ( email )

Department of Economics
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Columbia, SC 29208
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HOME PAGE: http://philipbrookins.com

Alexander Matros

Moore School of Business ( email )

1014 Greene St
Columbia, SC 29208
United States

Foteini Tzachrista

University of Illinois at Chicago

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