Overbidding and Overspreading in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules

Overbidding and Overspreading in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules

Authors

Published

Games and Economic Behavior, vol. 87, pp. 224-238, 2014

Website

http:// ideas.repec.org/p/chu/wpaper/14-08.html

Abstract

We study experimentally the effects of cost structure and prize allocation rules on the performance of rent-seeking contests. Most previous studies use a lottery prize rule and linear cost, and ?nd both overbidding relative to the Nash equilibrium prediction and signi?cant variation of efforts, which we term ‘overspreading.’ We investigate the effects of allocating the prize by a lottery versus sharing it proportionally, and of convex versus linear costs of effort, while holding ?xed the Nash equilibrium prediction for effort. We ?nd the share rule results in average effort closer to the Nash prediction, and lower variation of effort. Combining the share rule with a convex cost function further enhances these results. We can explain a signi?cant amount of non-equilibrium behavior by features of the experimental design. These results contribute towards design guidelines for contests based on behavioral principles that take into account implementation features of a contest.