Expectations-based loss aversion in contests

Qiang Fu, Youji Lyu, Zenan Wu and Yuanjie Zhang

Games and Economic Behavior, 2022, vol. 133, issue C, 1-27

Abstract: This paper studies a multi-player lottery contest in which heterogeneous contestants exhibit reference-dependent loss aversion à la Kőszegi and Rabin (2006, 2007). We verify the existence and uniqueness of pure-strategy choice-acclimating personal Nash equilibrium (CPNE) under moderate loss aversion and fully characterize the equilibrium. The equilibrium sharply contrasts with that in the two-player risk-neutral symmetric case. Loss aversion can lead contestants' individual efforts to change nonmonotonically, while the total effort strictly decreases. Further, it always leads to a more elitist distributional outcome, in the sense that a smaller set of contestants remain active in the competition and stronger contestants' equilibrium winning probabilities increase. We demonstrate that loss aversion generates a fundamentally different decision problem than risk aversion and develop a rationale that explains the contrasting predictions from the two frameworks. Finally, our results are robust under the alternative equilibrium concept of preferred personal Nash equilibrium (PPNE).

Keywords: Loss aversion; Contest; Reference-dependent preference; Choice-acclimating personal Nash equilibrium (CPNE); Preferred personal Nash equilibrium (PPNE) (search for similar items in EconPapers)
JEL-codes: C72 D72 D81 D91 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:133:y:2022:i:c:p:1-27

DOI: 10.1016/j.geb.2022.01.018

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