Contests and Negotiation Between Hubristic Players

Iain Long

No E2019/17, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: Why do contests exist in settings where negotiation provides a costless alternative? I assess a new explanation: parties may be overconfident about their ability or optimistic about their chances of winning. For both parties in a contest, this hubris: (i) reduces the incentive to exit the contest; (ii) reduces effort; and (iii) increases expected payoffs. Whilst hubris leads to the contest being preferred to costless negotiation, the welfare loss is nonmonotonic in either behavioural bias.

Keywords: Contests; Optimism bias; Overconfidence bias; Negotiation (search for similar items in EconPapers)
JEL-codes: C71 D74 D91 (search for similar items in EconPapers)
Pages: 8 pages
Date: 2019-08
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