Impulsive Behavior in Competition: Testing Theories of Overbidding in Rent-Seeking Contests

Abstract

Researchers have proposed various theories to explain overbidding in rentseeking contents, including mistakes, systematic biases, the utility of winning, and relative payoff maximization. Through an eight-part experiment, we test and find significant support for the existing theories. Also, we discover some new explanations based on cognitive ability and impulsive behavior. Out of all explanations examined, we find that impulsivity is the most important factor explaining overbidding in contests.JEL Classifications: C72, C91, D01, D72

War and conflict in economics: Theories, applications, and recent trends

“…One such phenomenon is over-expenditure of resources (also known as overbidding or overdissipation): the average expenditure of participants in laboratory experiments is significantly higher than predicted by the Nash equilibrium. This finding was first discovered by Millner and Pratt (1989), and since it has been replicated by numerous other experiments (see the review by Sheremeta, 2013). The magnitude of over-expenditure in some studies is so high that on average participants receive negative payoffs.…”

“…Most laboratory studies also find support for the main predictions of the theory, such as the incentive effect (Bull et al, 1987;Van Dijk et al, 2001), the size effect (Gneezy and Smorodinsky, 2006;Sheremeta, 2011;Morgan et al, 2012) and the discouragement effect (Davis and Reilly, 1998;Fonseca, 2009). However, experimental studies also uncovered a number of important phenomena which are not predicted by the theory.…”

“…The phenomenon of over-expenditure has attracted much attention, and a number of explanations have been offered. Some of the common explanations include non-monetary utility of winning, mistakes, systematic biases, relative payoff maximization, and impulsivity (see Sheremeta, 2015, for a summary).…”

“…In such models, agents are nevertheless typically assumed to choose an optimal action, given whatever additional constraints are imposed by the modeler. For example, modelers have assumed that some individuals gain additional utility from the simple fact of winning, independent of the prize won, as a potential account of high conflict expenditures (see Cox et al (1988) for a theoretical treatment, Goeree et al (2002) for an empirical strategy to identify the joy of winning, and Sheremeta (2010) for an experimental method directly measuring joy of winning). In a related direction, increasing attention has been paid to the behavioral consequences of conflict, as for example, in recent evidence that conflict can induce a preference for certainty and/or encourage cooperation (Callen et al, 2014;Bauer et al, 2016).…”

The pros and cons of workplace tournaments

“…In some cases, the extent to which participants over-exert effort is so high that participants, on average, receive negative payoffs [5], [6].…”