Designing Contests Between Heterogeneous Contestants: An Experimental Study of Tie-Breaks and Bid-Caps in All-Pay Auctions*

A well-known theoretical result in the contest literature is that greater heterogeneity decreases investments of contestants because of the “discouragement effect.” Levelling the playing field by favouring weaker contestants through strict bid-caps and favourable tie-breaking rules can reduce discouragement and increase the designer\u27s revenue. We test these predictions in a laboratory experiment. Our data confirm that placing bid-caps and using favourable tie-breaking rules significantly diminishes discouragement of weaker contestants. However, its impact on revenues is muted by the fact that the encouragement of weaker contestants is offset by stronger contestants competing less aggressively, even when not predicted by theory. We discuss deviations from the Nash predictions in light of different behavioural approaches

Strategically Equivalent Contests

Using a two-player Tullock-type contest, we show that intuitively and structurally different contests can be strategically equivalent. Strategically equivalent contests generate the same best response functions and, as a result, the same equilibrium efforts. However, strategically equivalent contests may yield different equilibrium payoffs. We propose a simple two-step procedure to identify strategically equivalent contests. Using this procedure, we identify contests that are strategically equivalent to the original Tullock contest, and provide new examples of strategically equivalent contests. Finally, we discuss possible contest design applications and avenues for future theoretical and empirical research

Experimental Research on Contests

Costly competitions between economic agents are modeled as contests. Researchers use laboratory experiments to study contests and test comparative static predictions of contest theory. Commonly, researchers find that participants’ efforts are significantly higher than predicted by the standard Nash equilibrium. Despite overbidding, most comparative static predictions, such as the incentive effect, the size effect, the discouragement effect and others are supported in the laboratory. In addition, experimental studies examine various contest structures, including dynamic contests (such as multi-stage races, wars of attrition, tug-of-wars), multi-dimensional contests (such as Colonel Blotto games), and contests between groups. This article provides a short review of such studies

Are individuals more risk and ambiguity averse in a group environment or alone? Results from an experimental study

Most decision-making research in economics focuses on individual decisions. Yet, we know, from psychological research in particular, that individual preferences can be sensitive to social pressures. In this paper, we study the impact of a group environment on individual preferences for risky (i.e., known probabilities) and ambiguous (i.e., unknown probabilities) prospects. In our experiment, each participant was invited to make a series of lottery-choice decisions in two different conditions. In the Alone condition, individuals made private choices, whereas in the Group condition, individuals belonged to a three-person group and group members' choices were aggregated according to either a majority or unanimity rule. This design allows us to study the impact of a group environment on individuals' attitude towards both risky and ambiguous prospects, while controlling for the decision rule used in the group. Our experimental results show that when individuals are in the Group condition, they tend to be less risk averse and more ambiguity averse than when they are not part of a group (Alone condition). Our experiment also suggests that the decision rule matters as it shows that these two trends tend to be stronger when the group implements a unanimity rule. Specifically, we found that individuals who belong to a group implementing a unanimity rule are significantly less risk averse than individuals who belong to a group that relies on the majority rule. We obtained a similar-but non-significant-result under ambiguity

Promises and lies: can observers detect deception in written messages

Abstract: We design a laboratory experiment to examine predictions of trustworthiness in a novel three-person trust game. We investigate whether and why observers of the game can predict the trustworthiness of hand-written communications. Observers report their perception of the trustworthiness of messages, and make predictions about the senders’ behavior. Using observers’ decisions, we are able to classify messages as “promises” or “empty talk.” Drawing from substantial previous research, we hypothesize that certain factors influence whether a sender is likely to honor a message and/or whether an observer perceives the message as likely to behonored: the mention of money; the use of encompassing words; and message length. We find that observers have more trust in longer messages and “promises”; promises that mention money are significantly more likely to be broken; and observers trust equally in promises that do and do not mention money. Overall, observers perform slightly better than chance at predicting whether a message will be honored. We attribute this result to observers’ ability to distinguish promises from empty talk, and to trust promises more than empty talk. However, within each of these two categories, observers are unable to discern between messages that senders will honor from those that they will not

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

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 toward risk using simple lotteries. The results indicate that groups make less risky decisions, which are possible explanations for lower bids in contests. Most importantly, we find that groups learn to make lower bids from communication and negotiation between group members. © 2009 Springer-Verlag

Three-player trust game with insider communication

We examine behavior in a three-player trust game in which the first player may invest in the second and the second may invest in the third. Any amount sent from one player to the next is tripled. The third player decides the final allocation among three players. The baseline treatment with no communication shows that the first and second players send significant amounts and the third player reciprocates. Allowing insider communication between the second and the third players increases cooperation between these two. Interestingly, there is an external effect of insider communication: the first player who is outside communication sends 54% more and receives 289% more than in the baseline treatment. As a result, insider communication increases efficiency from 44% to 68%. © 2013 Western Economic Association International

Designing Contests between Heterogeneous Contestants: An Experimental Study of Tie-Breaks and Bid-Caps in All-Pay Auctions

A well-known theoretical result in the contest literature is that greater heterogeneity decreases investments of contestants because of the “discouragement effect.” Levelling the playing field by favouring weaker contestants through strict bid-caps and favourable tie-breaking rules can reduce discouragement and increase the designer's revenue. We test these predictions in a laboratory experiment. Our data confirm that placing bid-caps and using favourable tie-breaking rules significantly diminishes discouragement of weaker contestants. However, its impact on revenues is muted by the fact that the encouragement of weaker contestants is offset by stronger contestants competing less aggressively, even when not predicted by theory. We discuss deviations from the Nash predictions in light of different behavioural approaches