Contests with Ambiguous Prizes

Cary Deck (), Aidan Hathaway, Emma Kate Henry, Tigran Melkonyan and Samuel Redinger
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Cary Deck: University of Alabama and Economic Science Institute, Chapman University
Aidan Hathaway: University of Alabama
Emma Kate Henry: University of Alabama
Tigran Melkonyan: University of Alabama
Samuel Redinger: University of Alabama

Working Papers from Chapman University, Economic Science Institute

Abstract: This paper examines behavior in contests where the prize value is ambiguous. We develop a theoretical model of bidding in a Tullock contest with an ambiguous prize where contestants account for the ambiguity attitude of their rival. Ambiguity affects optimal behavior via two countervailing channels - a direct effect arising from contestants’ ambiguity about the value of the prize and an indirect effect corresponding to the effect of ambiguity on the opponent’s behavior. Using a controlled laboratory experiment, we elicit individual risk and ambiguity attitudes and compare predicted and observed behavior in contests with an ambiguous prize, a risky prize and certain prizes. A comparison between contests with ambiguous and risky prizes, shows that participants invest significantly less under ambiguity. Additionally, we decompose the effect of changing from a certain prize to an ambiguous prize into two components - the first is the effect of introducing risk and the second is the effect of introducing ambiguity. Empirically, we find that both effects are significant, but work in opposite directions.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:25-16

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