Sandbagging or Bluffing in Contest --- Theory and Experiment

Abstract

This study investigates cost-free signaling strategies, focusing on sandbagging and bluffing in competitive environments such as promotions. Using a two-stage all-pay auction model with a Cobb-Douglas utility framework, we derive the equilibrium signaling strategies of agents: high-type agents engage in sandbagging by signaling the lowest type to other competitors, while low-type agents bluff by signaling the highest type. Our laboratory experiment provides evidence supporting these signaling strategies by senders and finds that receivers' investments are only marginally affected by these signals.

Keywords: Contest, signaling, Bayesian Nash Equilibrium