Academic journal article Economic Inquiry

Contest Design: An Experimental Investigation

Academic journal article Economic Inquiry

Contest Design: An Experimental Investigation

Article excerpt

I. INTRODUCTION

Costly competitions between economic agents are often portrayed as contests. Examples range from college admissions and competition for promotions to global relationships in which different countries and political parties expend resources to lobby their own interests (Krueger 1974; Tullock 1980). The variety of economic situations that can be described as contests has attracted enormous attention from economic theorists. The main focus of this literature is the relationship between the setup of rent-seeking contests and the strategic behavior of contestants. It is well recognized that strategic behavior is sensitive to different contest rules. Therefore, depending on the objective, a careful design of each contest is required.

Despite the abundance of theoretical work on contest design, no experimental research has specifically compared alternative contest mechanisms. (1) To begin to bridge this gap, this study investigates and compares the performance of four simultaneous contests: a grand contest (GC), two multi-prize settings (equal and unequal prizes), and a contest which consists of two subcontests (SCs). Consistent with the theory, we find that the GC generates the highest effort levels among all simultaneous contests. In multi-prize settings, equal prizes produce lower efforts than unequal prizes. Our results also provide strong empirical support for the argument that joint contests generate higher efforts than an equivalent number of SCs. However, contrary to the theory, we find significant over-dissipation in all contests. This over-dissipation can be partially explained by strong endowment size effects. Subjects who receive higher endowments tend to over-dissipate, whereas such over-dissipation disappears when the endowments are lower. This behavior is consistent with the predictions of a quantal response equilibrium (QRE). Finally, there is a strong heterogeneity between subjects and individual expenditures over time, which is clearly inconsistent with the symmetric pure strategy equilibrium. The deviations from the symmetric equilibrium can be explained to some extent by differences in risk preference and probabilistic nature of lottery contests.

A number of theoretical papers have been devoted to the design of an optimal contest that generates the highest revenue--the total amount of effort expended by the contestants. A common motivation for such research is the objective of various agencies (political parties, lottery administrators, and economic groups) to maximize earnings by extracting the highest effort from the contestants. Gradstein and Konrad (1999), for example, provide a rationale for a multistage contest design by endogenizing the choice of contest structure. They show that, depending on a return to scale parameter of the contest success function, a multistage contest may induce higher effort by the participants than a one-stage contest. In the same line of research, Baik and Lee (2000) study a two-stage contest with effort carryovers. They show that, in the case of player-specific effort carry-overs, the rent-dissipation rate (defined as the ratio of the expended total effort to the value of the prize) increases in the carryover rate and the rent is fully dissipated with carryover rate equal to one. Finally, Fu and Lu (2007) investigate the optimal structure of a multistage sequential-elimination contest with pooling competition in each stage. They demonstrate that the optimal contest eliminates one contestant at each stage until the finale in which a single winner takes the entire prize.

Overall, it is generally observed in the contest literature that pooling competition generates higher dissipation rates (Amegashie 2000; Clark and Riis 1998; Fu and Lu 2009; Moldovanu and Sela 2006). (2) Clark and Riis (1998) show that the income maximizing contest administrator obtains the highest rent-seeking effort when, instead of many small prizes, a large prize is provided. …

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