Academic journal article Economic Inquiry

Inefficiency as a Strategic Device in Group Contests against Dominant Opponents

Academic journal article Economic Inquiry

Inefficiency as a Strategic Device in Group Contests against Dominant Opponents

Article excerpt

I. INTRODUCTION

Many strategic situations in economics and politics can be understood as contests: R&D races, oligopolistic competition, military conflicts, lobbying, etc. In most cases, it is not individuals who compete against each other but groups or teams with several members. In such situations, free-rider problems within groups arise: when contributing to his group's effort in the contest, every individual bears the full marginal costs while the marginal benefits largely spill over to the rest of the group (Konrad 2009, Chap. 5.5 and 7). The attending positive externalities arise independently of whether the contested rent is a group-specific public good (Katz, Nitzan, and Rosenberg 1990; Nitzan and Ueda 2009), a private good (Nitzan 1991a, 1991b; Nitzan and Ueda 2009), or a mixed good (Esteban and Ray 2001; Nitzan and Ueda 2011).

To a large extent, the intensity of free-riding or, conversely, the motivation for individuals to exert effort in a contest is shaped by the intra-group incentive scheme (or governance structure). In standard contests, incentives are inseparably linked to the sharing rule, i.e., to the (usually exogenous) procedure by which the rents acquired in the contest are distributed within the group. (1) In a number of economic applications, however, incentives to exert effort appear to be separate, or are even willfully separated, from the sharing rule. Phenomena such as team spirit (Akerlof and Kranton 2005), identification with the group (Sherif 1966; Bornstein and Ben-Yossef 1994), peer pressure (Kandel and Lazear 1992), or social norms to contribute to the social good (Elster 1989) are examples for this separation. Alternatively, groups could apply selective incentive schemes based on relative performance (Lazear and Rosen 1981) or marginally align individual and group incentives (Nitzan and Ueda 2009). In all these scenarios, individuals behave cooperatively, i.e., in the interest of the entire group--even if the final distribution of rents follows a standard sharing rule. Mechanisms to induce cooperation often are costly (Sanchez-Pages and Straub 2010), may only work under restrictive conditions (Che and Gale 2003), require strategic coordination among individuals (Hardin 1995), or cannot be ensured to be obeyed unanimously (Oliver 1980). This might explain why they do not emerge universally or automatically. The point we make in this article is even stronger: even if there existed perfect and costless solutions to within-group free-riding problems--which will henceforth be called intra-group efficient incentive schemes (IGEIS)--they might not (always) be adopted.

Why would a group for which an IGEIS is freely available not wish to utilize it but rather adopt an apparently inefficient governance structure? By definition, an IGEIS internalizes all within-group externalities and seems to be a safe way to increase one's payoffs. However, this reasoning ignores repercussions that arise in strategic environments like contests. Suppose, for example, that the competing groups have sufficiently unequal strengths, say, due to unequal sizes or different comparative advantages. Then the weaker group may refrain from implementing a costless IGEIS to avoid the contest from heating up. Adoption of an IGEIS makes a group more efficient and, consequently, more aggressive in the contest. On one hand, higher efforts constitute a cost, on the other, they affect the share of the rent that this group can hope to acquire (or the likelihood of succeeding in the contest). (2) An IGEIS clearly enhances a group's prospects if the other group did not change its behavior. However, if members of the opponent group reply with a sufficiently strong increase in their contest efforts, this diminishes and may potentially more than offset the gains from one's own increased efforts.

Whether this happens depends on the direction of the strategic interaction between groups. The detrimental firing-back effect can only become relevant if the other group's efforts are (sufficiently strong) strategic complements to one's own efforts. …

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