Investing Even in Uneven Contests: Effects of Asymmetry on Investment in Experimental All-Pay Contests

Einav Hart, Judith Avrahami, Yaakov Kareev and Peter M. Todd

Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem

Abstract: Many competitions require investment of nonrefundable resources, e.g., political campaigns, financial markets, sports or courting rituals. One contestant wins the prize for the invested amount, while all others forfeit their investments without receiving compensation. Frequently, contests are asymmetric, due to differing resources or prize valuations. This could lead weaker contestants to avoid investing, and stronger ones to lower their investment. Two experiments explored the effects of asymmetry between the contestants – arising from their endowments or prizes – on investments. Subjects played both symmetric and asymmetric contests, enabling direct within-subject comparisons. We observed an effect of asymmetry only when it concerned endowments: Subjects invested less when their endowments were asymmetric, whereas (a-)symmetry in the prizes did not influence investments. The changes between consecutive investments can be explained by reactions to the previous outcome (win or loss) in terms of regret over the previous investment being too much or too little.

Pages: 26 pages
Date: 2014-02
New Economics Papers: this item is included in nep-exp and nep-ger
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