Two-Stage Contests with Budget Constraints: An Experimental Study

Parco, James E.; Amaldoss, Wilfred; Rapoport, Anatol

doi:10.2139/ssrn.605265

“…Moreover, contrary to the theoretical prediction of a unique pure strategy Nash equilibrium, experimental studies document that individual bids are distributed on the entire strategy space, and even aggregate individual behavior is heterogeneous Pratt, 1989, 1991;Davis and Reilly, 1998;Potters et al, 1998;Parco et al, 2005).…”

Section: Introductionmentioning

confidence: 89%

Can Groups Solve the Problem of Over-Bidding in Contests?

Sheremeta

¹

,

Zhang

²

2009

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This study reports an experiment that examines whether groups can better comply with theoretical predictions than individuals in contests. Our experiment replicates previous findings that individual players significantly overbid relative to theoretical predictions, incurring substantial losses. There is high variance in individual bids and strong heterogeneity across individual players. The new findings of our experiment are that groups make 25% lower bids, their bids have lower variance, and group bids are less heterogeneous than individual bids. Therefore, groups receive significantly higher and more homogeneous payoffs than individuals. We elicit individual and group preferences towards risk using simple lotteries. The results indicate that groups make less risky decisions, which is a possible explanation for lower bids in contests. Most importantly, we find that groups learn to make lower bids from communication and negotiation between group members. AbstractThis study reports an experiment that examines whether groups can better comply with theoretical predictions than individuals in contests. Our experiment replicates previous findings that individual players significantly overbid relative to theoretical predictions, incurring substantial losses. There is high variance in individual bids and strong heterogeneity across individual players. The new findings of our experiment are that groups make 25% lower bids, their bids have lower variance, and group bids are less heterogeneous than individual bids. Therefore, groups receive significantly higher and more homogeneous payoffs than individuals. We elicit individual and group preferences towards risk using simple lotteries. The results indicate that groups make less risky decisions, which is a possible explanation for lower bids in contests. Most importantly, we find that groups learn to make lower bids from communication and negotiation between group members.JEL Classifications: C72, C91, C92, D72

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“…Another oft-cited explanation is non-monetary utility of winning (Parco et al, 2005;Sheremeta, 2013Sheremeta, , 2015. We find that the reduced probability of the contest ending in battle 2 and the resulting over-expenditure is largely driven by the increased expenditure in battle 2, by both battle 1 winner and battle 1 loser (Finding 3).…”

Section: Findingmentioning

confidence: 99%

“…Both Parco et al (2005) and Sheremeta (2010b) suggest that the utility of winning is increasing in the number of stages.…”

mentioning

confidence: 99%

New Hampshire Effect: Behavior in Sequential and Simultaneous Election Contests

Irfanoglu,

Mago,

Sheremeta

2015

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Sequential contests are predicted to induce lower expenditure than simultaneous contests. This prediction is a result of a "New Hampshire Effect" -a strategic advantage created by the winner of the first battle. Contrary to this prediction, however, our laboratory study of the three-battle contests shows that sequential contests generate significantly higher expenditure than simultaneous contests. In case of sequential contests, we observe significant over-expenditure in all three battles and find no evidence of the "New Hampshire Effect." Despite the strategic advantage, winners of the first battle make similar expenditures in the second battle as losers of the first battle. Moreover, instead of decreasing, subjects increase their expenditure in the second battle relative to the first battle. In case of simultaneous contests, subjects do not employ a uniform expenditure strategy and instead use a "guerilla warfare" strategy by focusing on only two of the three battles. We propose several explanations for these findings and discuss some implications.JEL Classifications: C72, C73, C91, D72

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“…In particular, Result 2 suggests that groups better comply with game theoretic Another puzzle for contest theory comes from the observation that even aggregate individual behavior is heterogeneous (Parco et al, 2005;Sheremeta, 2009a). Can risk aversion explain the differences in individual and group bidding behavior in lottery contests?…”

Section: Figure 42 -Distribution Of Bidsmentioning

confidence: 99%

Can groups solve the problem of over-bidding in contests?

Sheremeta

¹

,

Zhang

²

2009

View full text Add to dashboard Cite

This study reports an experiment that examines whether groups can better comply with theoretical predictions than individuals in contests. Our experiment replicates previous findings that individual players significantly overbid relative to theoretical predictions, incurring substantial losses. There is high variance in individual bids and strong heterogeneity across individual players. The new findings of our experiment are that groups make 25% lower bids, their bids have lower variance, and group bids are less heterogeneous than individual bids. Therefore, groups receive significantly higher and more homogeneous payoffs than individuals. We elicit individual and group preferences towards risk using simple lotteries. The results indicate that groups make less risky decisions, which is a possible explanation for lower bids in contests. Most importantly, we find that groups learn to make lower bids from communication and negotiation between group members.JEL Classifications: C72, C91, C92, D72

show abstract

Two-Stage Contests with Budget Constraints: An Experimental Study

Cited by 45 publications

References 49 publications

Can Groups Solve the Problem of Over-Bidding in Contests?

Can Groups Solve the Problem of Over-Bidding in Contests?

New Hampshire Effect: Behavior in Sequential and Simultaneous Election Contests

Can groups solve the problem of over-bidding in contests?

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