Resource Allocation Contests: Experimental Evidence

Shupp, Robert and Sheremeta, Roman (2013): Resource Allocation Contests: Experimental Evidence. Forthcoming in: Journal of Economic Psychology

Abstract

Many resource allocation contests have the property that individuals undertake costly actions to appropriate a potentially divisible resource. We design an experiment to compare individuals’ decisions across three resource allocation contests which are isomorphic under risk-neutrality. The results indicate that in aggregate the single-prize contest generates lower expenditures than either the proportional-prize or the multi-prize contest. Interestingly, while the aggregate results indicate similar behavior in the proportional-prize and multi-prize contests, individual level analysis indicates that the behavior in the single-prize contest is more similar to the behavior in the multi-prize contest than in the proportional-prize contest. We also elicit preferences toward risk, ambiguity and losses, and find that while such preferences cannot explain individual behavior in the proportional-prize contest, preferences with regard to losses are predictive of behavior in both the single-prize and multiple-prize contests. Therefore, it appears that loss aversion is correlated with behavior in the single-prize and multi-prize contests where losses are likely to occur, but not in the proportional-prize contest where losses are unlikely.

• Item Type: MPRA Paper
• Language: English
• Keywords: contest, rent-seeking, experiments, risk aversion, game theory
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior; D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior

References

Anderson, L.A., & Stafford, S.L. (2003). An Experimental Analysis of Rent Seeking under Varying Competitive Conditions. Public Choice, 115, 199-216.

Becker, G.M., Degroot, M.H. & Marschak, J. (1964). Measuring utility by a single-response sequential method. Behavioral Science, 9, 226–232.

Berry, S.K. (1993). Rent-seeking with multiple winners. Public Choice 77, 437-443.

Börgers, T. (1993). Pure Strategy Dominance. Econometrica, 61, 421-430.

Cason, T.N., Masters, W.A., & Sheremeta, R.M. (2010). Entry into winner-take-all and proportional-prize contests: An experimental study. Journal of Public Economics, 94, 604-611.

Cason, T.N., Masters, W.A. & Sheremeta, R.M. (2011). Winner-Take-All and Proportional-Prize Contests: Theory and Experimental Results. Chapman University, Working Paper.

Cason, T.N., Sheremeta, R.M., & Zhang, J. (2012). Communication and Efficiency in Competitive Coordination Games. Games and Economic Behavior, 76, 26-43.

Chen, H., Ham, S.H. & Lim, N. (2011). Designing Multiperson Tournaments with Asymmetric Contestants: An Experimental Study. Management Science, 57, 864-883.

Chowdhury, S.M., & Sheremeta, R.M. (2011). Multiple Equilibria in Tullock Contests. Economics Letters, 112, 216-219.

Chowdhury, S.M., Sheremeta, R.M., Turocy, T.L. (2012). Overdissipation and Overspreading in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules. Chapman University, Working Paper.

Clark, D.J., & Riis, C. (1998). Influence and the Discretionary Allocation of Several Prizes. European Journal of Political Economy, 14, 605-625.

Cornes, R.C., & Hartley, R. (2003). Risk aversion, heterogeneity and contests. Public Choice, 117, 1-25.

Cox, J.C., Vernon L.S., & Walker, J.M. (1985). Experimental Development of Sealed-Bid Auction Theory: Calibrating Controls for Risk Aversion. American Economic Review, 75, 160-165.

Davis, D., & Reilly, R. (1998). Do Too Many Cooks Always Spoil the Stew? An Experimental Analysis of Rent-Seeking and the Role of a Strategic Buyer. Public Choice, 95, 89-115.

Dechenaux, E., Kovenock, D., & Sheremeta, R.M. (2012). A Survey of Experimental Research on Contests, All-Pay Auctions and Tournaments. Chapman University, Working Paper.

Dickinson, D.L., & Isaac, R.M. (1998). Absolute and Relative Rewards for Individuals in Team Production. Managerial and Decision Economics, 19, 299-310.

Fallucchi, F., Renner, E. & Sefton, M. (2012). Information feedback and contest structure in rent-seeking games. Working Paper.

Frank, R.H., & Cook, P. (1995). The Winner-Take-All Society. Penguin Books, New York, New York.

Fu, Q., & Lu, J. (2009). The Beauty of “Bigness”: on Optimal Design of Multi Winner Contests. Games and Economic Behavior, 66, 146–161.

Fudenberg, D., Gilbert, R., Stiglitz, J., & Tirole, J. (1983). Preemption, leapfrogging and competition in patent races. European Economic Review, 22, 3-31.

Gardner, R., Ostrom, E., & Walker, J.M. (1990). The nature of common pool resource problems. Rationality and Society, 2, 335-358.

Herrmann, B., & Orzen, H. (2008). The appearance of homo rivalis: social preferences and the nature of rent seeking. University of Nottingham, Working Paper.

Hillman, A.L., & Katz, E. (1984). Risk-Averse Rent Seekers and the Social Cost of Monopoly Power. Economic Journal, 94, 104-110.

Hillman, A.L., & Riley, J.G. (1989). Politically contestable rents and transfers. Economics and Politics, 1, 17-40.

Holt, C.A., & Laury, S.K. (2002). Risk Aversion and Incentive Effects. American Economic Review, 92, 1644-55.

Kirchkamp, O., Reiss, J. P., & Sadrieh, A. (2008). A pure variation of risk in first-price auctions. Working Paper.

Konrad, K.A., & Schlesinger, H. (1997). Risk Aversion in Rent-Seeking and Rent-Augmenting Games. Economic Journal, 107, 1671-1683.

Krueger, A.O. (1974). The Political Economy of the Rent-Seeking Society. American Economic Review, 64, 291-303.

Lazear, E.P., & Rosen, S. (1981). Rank-Order Tournaments as Optimum Labor Contracts. Journal of Political Economy, 89, 841-864.

Ledyard, J.O. (1986). The Scope of the Hypothesis of Bayesian Equilibrium. Journal of Economic Theory, 39, 59-82.

Lim, W., Matros, A., & Turocy, T. (2012). Bounded rationality and group size in Tullock contests: Experimental evidence. Working Paper.

Long, N.V., & Vousden, N. (1987). Risk-averse rent seeking with shared rents. Economic Journal, 97, 971-985.

Mago, S.D., Savikhin, A.S., & Sheremeta, R.M. (2012). Facing Your Opponents: Social Identification and Information Feedback in Contests. Chapman University, Working Paper.

Mago, S.D., Sheremeta, R.M., & Yates, A. (2013). Best-of-Three Contest Experiments: Strategic Versus Psychological Momentum. International Journal of Industrial Organization, 31, 287-296.

Masiliunas, A., Mengel, F., & Reiss, J.P. (2012). (Strategic) Uncertainty and the Explanatory Power of Nash Equilibrium in Tullock Contests. Working Paper.

Millner, E., & Pratt, M. (1989). An Experimental Investigation of Efficient Rent-seeking. Public Choice, 62, 139-151.

Millner, E., & Pratt, M. (1991). Risk Aversion and Rent-seeking: An Extension and Some Experimental Evidence. Public Choice, 69, 81-92.

Moldovanu, B., & Sela, A. (2001). The optimal allocation of prizes in contests. American Economic Review, 91, 542-558.

Morgan, J., Orzen, H., & Sefton, M. (2012). Endogenous Entry in Contests. Economic Theory, 51, 435-463.

Müller, W., & Schotter, A. (2010). Workaholics and Dropouts in Organizations. Journal of the European Economic Association, 8, 717-743.

Nieken, P., & Sliwka, D. (2010). Risk-taking tournaments – Theory and experimental evidence. Journal of Economic Psychology, 31, 254-268.

Potters, J., de Vries, C., & van Winden, F. (1998). An Experimental Examination of Rational Rent-seeking. European Journal of Political Economy, 14, 783-800.

Price, C.R., & Sheremeta, R.M. (2011). Endowment Effects in Contests. Economics Letters, 111, 217–219.

Price, C.R., & Sheremeta, R.M. (2013). Endowment Origin, Demographic Effects and Individual Preferences in Contests. Journal of Economic Strategy and Management, forthcoming.

Savikhin, A.S., & Sheremeta, R.M. (2013). Simultaneous Decision-Making in Competitive and Cooperative Games. Economic Inquiry, 51, 1311-1323.

Sheremeta, R.M., & Zhang. J. (2010). Can Groups Solve the Problem of Over-Bidding in Contests? Social Choice and Welfare, 35, 175-197.

Sheremeta, R.M. (2010). Experimental Comparison of Multi-Stage and One-Stage Contests. Games and Economic Behavior, 68, 731-747.

Sheremeta, R.M. (2011). Contest Design: An Experimental Investigation. Economic Inquiry, 49, 573–590.

Sheremeta, R.M. (2013). Overbidding and Heterogeneous Behavior in Contest Experiments. Journal of Economic Surveys, 27, 491-514.

Skaperdas, S., & Gan, L. (1995). Risk Aversion in Contests. Economic Journal, 105, 951-62.

Snyder, J. (1989). Election goals and the allocation of campaign resources. Econometrica, 57, 630-660.

Tong, K., & Leung, K. (2002). Tournament as a Motivational Strategy: Extension to Dynamic Situations with Uncertain Duration. Journal of Economic Psychology, 23, 399-420.

Tullock, G. (1967). The Welfare Costs of Tariffs, Monopolies and Theft. Western Economic Journal, 5, 224-232.

Tullock, G. (1980). Efficient Rent Seeking. In J.M. Buchanan, R.D. Tollison, G. Tullock, (Eds.), Toward a theory of the rent-seeking society. College Station, TX: Texas A&M University Press, pp. 97-112.

Walker, J.M., Gardner, R., & Ostrom, E. (1990). Rent Dissipation in Limited Access Common Pool Resource Environments: Experimental Evidence. Journal of Environmental Economics and Management, 19, 203-211.

Weitzman M.L., & Kruse, D.L., (1990). Profit Sharing and Productivity, in A. Blinder (ed.) Paying for Productivity, Brookings.

Zheng, X., & Vukina, T. (2007). Efficiency gains from organizational innovation: Comparing ordinal and cardinal tournament games in broiler contracts. International Journal of Industrial Organization, 25, 843-859.