Competition and Anomalies Redux: Evidence from U.S. Auto Dealers

David Huffman (), Lamar Pierce, Alex Rees-Jones and Reyes, Germán ()
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David Huffman: University of Pittsburgh
Lamar Pierce: Washington University in St. Louis
Alex Rees-Jones: University of Pennsylvania, Wharton School and NBER
Reyes, Germán: Middlebury College

No 18766, IZA Discussion Papers from IZA Network @ LISER

Abstract: We examine a choice between bonus contracts offered to dealers of a U.S. auto manufacturer. In our data, dealers select the non-profit-maximizing option in 20 percent of observations, costing the mistaken dealers $18,453 per year on average. We examine how the propensity to make this mistake varies with competition, identified both cross-sectionally and within dealers over time. Both analyses show that greater competition substantially lowers the rate of mistakes. However, even in the most competitive markets, consequential mistakes persist. Our results suggest that competition disciplines mainly through within-dealer changes in behavior rather than entry and exit.

Keywords: behavioral economics; market competition; anomalies; non-profit-maximizing behavior; behavioral firms; incentive contracts; automobile dealers (search for similar items in EconPapers)
JEL-codes: D22 D91 L13 L62 M52 (search for similar items in EconPapers)
Date: 2026-06
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