Property Rights and Loss Aversion in Contests

Abstract

We analyze the effects of property rights and the resulting loss aversion on contest outcomes. We study three situations: in “gain” two players start with no prize and make sunk bids to win a prize; in “loss” both the players start with prizes and whoever loses the contest loses their prize; and in “mixed” only one player starts with a prize that stays with him if he wins, but is transferred to the rival otherwise. Since the differences among the treatments arise only from framing, the expected utility and the standard loss aversion models predict no difference in bids across treatments. We introduce a loss aversion model in which the property rights are made salient, and as a result the reference point varies across treatments. This model predicts average bids in descending order in the loss, the mixed, and the gain treatment; and higher bids by the player with property rights in the mixed treatment. The results from a laboratory experiment broadly support these predictions. There is no significant difference in bids in the loss (gain) treatment and bids by property rights holder (nonholder) in the mixed treatment. A model incorporating both loss aversion and social preferences explains this result. (JEL C91, C72, D23, D74)

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“…Whereas Hypothesis 1 comes directly from the DR literature, Hypothesis 2 comes from the contest literature where a lagged bid of the opponent often has a positive effect on own bid (see, e.g., Chowdhury et al, 2018). These hypotheses are expected to hold especially among males,…”

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“…Average Bids Per Period in a Contest Experiment (from Chowdhury, Jeon, and Ramalingam 2016) presents experimentalists working on contests, in particular, with an important model for interpreting their results of which they would otherwise have been ignorant.…”

“…This is often not the case in contests, however. Figure 1 shows the average bids in 25 periods of 44 participants in a contest experiment reported by Chowdhury, Jeon, and Ramalingam (2016). The subjects played the game repeatedly in groups of 2, under a Tullock lottery contest success function where a contestant's probability of winning was the ratio of their bid to the total of bids.…”

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“…A specifically designed experiment replicating the two countervailing effects as mentioned above would contribute nicely to the literature. The interaction of wealth and loss aversion (Chowdhury et al 2018) may also be interesting. Finally, it would be worthwhile investigating such issues with field data.…”