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Overdissipation and Convergence in Rent-seeking Experiments: Cost structure and prize allocation rules

Subhasish Chowdhury, Roman Sheremeta () and Theodore Turocy ()

Working Papers from Chapman University, Economic Science Institute

Abstract: We study experimentally the effects of cost structure and prize allocation rules on the performance of rent-seeking contests. Most previous studies use a lottery prize rule and linear cost, and find both overdissipation relative to Nash equilibrium prediction and significant variation in individual subject efforts. In a 2 2 design, we investigate the effects of sharing the prize proportionally and of a convex cost function, while holding fixed the Nash equilibrium prediction for effort. We find that the share rule results in average effort closer to the Nash prediction, lower variation in individual efforts, and convergence of the distribution of individual efforts towards Nash over time. Combining the share rule with a convex cost function further enhances these results. Our findings indicate that a significant amount of subjects’ non-equilibrium behavior in contests can be explained by features of the experimental design. These results contribute towards design guidelines for contests based on behavioral principles that take into account contest features that may not affect the Nash equilibrium prediction. These lessons suggest design guidelines for future experiments on contests.

Keywords: rent-seeking; contest; contest design; experiments; quantal response; over-dissipation (search for similar items in EconPapers)
JEL-codes: C72 C91 D72 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012
New Economics Papers: this item is included in nep-exp and nep-gth
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Citations: View citations in EconPapers (18) Track citations by RSS feed

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