Social Loss Aversion and Optimal Contest Design

Lim, Noah

doi:10.1509/jmkr.47.4.777

Cited by 67 publications

(56 citation statements)

References 32 publications

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“…Given these findings, one would expect that orders in the multistore setting Management Science 56(11), pp. 1891-1910, © 2010 would also not conform to the theoretical prediction. One potential implication is that firms may not realize the full benefits of risk pooling because of the biases in order quantities.…”

Section: Introductionmentioning

confidence: 79%

“…1891-1910, © 2010 component associated with gains and losses relative to a reference point. 3 Specifically, we assume that each of the two types of costs faced by the decision maker in the newsvendor problem consists of two components-an actual cost component and a psychological cost component that depends on a reference point.…”

Section: Reference Dependence In the Multilocation Newsvendormentioning

confidence: 99%

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Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis

2010

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W e propose a behavioral theory to predict actual ordering behavior in multilocation inventory systems. The theory rests on a well-known stylized fact of human behavior: people's preferences are reference dependent. We incorporate reference dependence into the newsvendor framework by assuming that there are psychological costs of leftovers and stockouts. We also hypothesize that the psychological aversion to leftovers is greater than the disutility for stockouts. We then experimentally test the proposed theory in both the centralized and decentralized inventory structures using subjects motivated by substantial financial incentives. Consistent with the proposed theory, actual orders exhibit the so-called "pull-to-center" bias and the degree of bias is greater in the high-profit margin than in the low-profit margin condition. These systematic biases are shown to eliminate the risk-pooling benefit when the demands across store locations are strongly correlated. Because the proposed model nests the standard inventory and ex post inventory error minimization theories as special cases, one can systematically evaluate the predictive power of each alternative using the generalized likelihood principle. We structurally estimate all three theories using the experimental data, and the estimation results strongly suggest that the proposed behavioral theory captures actual orders and profits better. We also conduct two experiments to validate the behavioral model by manipulating the relative salience of the psychological costs of leftovers versus that of stockouts to alleviate the pull-to-center bias.

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Section: Introductionmentioning

confidence: 79%

Section: Reference Dependence In the Multilocation Newsvendormentioning

confidence: 99%

Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis

2010

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“…Lim et al (2009) design both a lab and a field experiment to examine the optimal prize structure for generating the highest sales effort. A follow up study by Lim (2010) addresses the role of social preferences in influencing behavior in rank-order sales tournaments. Finally, Chen et al (2011) study the role of asymmetries in sales contests.…”

Section: Applicationsmentioning

confidence: 99%

A Survey of Experimental Research on Contests, All-Pay Auctions and Tournaments

2012

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Many economic, political and social environments can be described as contests in which agents exert costly efforts while competing over the distribution of a scarce resource. These environments have been studied using Tullock contests, all-pay auctions and rank-order tournaments. This survey provides a comprehensive review of experimental research on these three canonical contests. First, we review studies investigating the basic structure of contests, including the number of players and prizes, spillovers and externalities, heterogeneity, risk and incomplete information. Second, we discuss dynamic contests and multi-battle contests. Then we review studies examining sabotage, feedback, bias, collusion, alliances, group contests and gender, as well as field experiments. Finally, we discuss applications of contests and suggest directions for future research. IntroductionMany economic, political and social environments can be described as contests in which competing agents have the opportunity to expend scarce resources -such as effort, money, time, or troops -in order to affect the probabilities of winning prizes. Examples range from the competition for mates, college admission, patents, or promotions within firms, to the process of litigation or lobbying politicians, to elections, sports competitions, and violent global conflicts (Tullock, 1967;Krueger, 1974). As is obvious from this list, these environments have attracted considerable attention in applications in a wide range of fields, both in-and out-side of economics. They have also been studied extensively by economic theorists in what has become known as the field of contest theory (Konrad, 2009). Although this field continues to attract many young theorists, it has its roots in three models developed in the mid-seventies to early eighties: the Tullock (1980) model of rent-seeking, the Lazear and Rosen (1981) rank-order tournament model, and the all-pay auction (Hirshleifer and Riley, 1978;Nalebuff and Stiglitz, 1983;Dasgupta, 1986;Hillman and Riley, 1989). Despite the fact that the three models historically developed somewhat independently, they represent special cases of a general contest model that can be formulated in a unified framework.Despite an extensive and established theoretical literature, much less effort has been devoted to empirically investigate individual behavior in different contests and compare such behavior with theoretical predictions. The main reason is that it is not trivial to measure individual effort in the field since the researcher can only observe the performance of contestants, which is a function of effort, ability and luck (Ericsson and Charness, 1994). The majority of empirical studies use either firm level data (Prendergast, 1999) or sports data (Szymanski, 2003). Because it is typically difficult to measure the actual effort expended by players in the field, almost all of these studies focus solely on investigating whether the pattern of outcomes is consistent with the theoretical predictions.Controlled experimen...

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“…They examine how allowing the players to communicate and how the nature of the messages players can send affect bargaining outcomes. Second, our paper adds to an emerging stream of work that shows that social preferences can explain competitive market behavior (Lehmann 2001), firm pricing strategies and consumer behavior in luxury goods markets Jain 2005, 2010), the prevalent use of linear wholesale price contracts in channels (Cui et al 2007), and why firms design sales contests with more winners than losers (Lim 2010, Chen et al 2011). Our paper bridges these two Downloaded from informs.org by [130.133.8.114] on 05 July 2015, at 23:12 .…”

Section: Introductionmentioning

confidence: 90%

Relationship Organization and Price Delegation: An Experimental Study

Lim

Ham

2014

Management Science

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P rice delegation to the salesforce is a practice widely adopted by firms. This paper examines the relationship between price delegation and managerial profits using a laboratory economics experiment. A novel feature of our experiment is that we study how varying the relationship organization of the sales manager and salesperson to allow for (1) requests by the salesperson for the manager to choose price delegation, and for (2) the manager to award a small bonus after observing the salesperson's decisions, can affect behavior. The results show that, contrary to the theoretical prediction, managers choose price delegation frequently and salespeople respond reciprocally, leading to higher manager profits under price delegation. Moreover, this behavior increases when requests and bonuses are allowed. We show that a behavioral economics model that incorporates positive reciprocity can explain these results well.Data, as supplemental material, are available at http://dx.

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Social Loss Aversion and Optimal Contest Design

Cited by 67 publications

References 32 publications

Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis

Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis

A Survey of Experimental Research on Contests, All-Pay Auctions and Tournaments

Relationship Organization and Price Delegation: An Experimental Study

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