A well-known theoretical result in the contest literature is that greater heterogeneity decreases performance of contestants because of the "discouragement effect." Leveling the playing field by favoring weaker contestants through strict bid-caps and favorable tie-breaking rules can reduce discouragement and increase the designer's revenue. We test these predictions in a laboratory experiment. Our data confirm that placing bid-caps and using favorable tie-breaking rules significantly diminishes discouragement of weaker contestants. The impact on revenue is more intricate, with mild bid-caps potentially increasing revenue. We discuss deviations from the Nash predictions in light of different behavioral approaches.
Designing Contests Between Heterogeneous Contestants: An Experimental Study of Tie-Breaks and Bid-Caps in All-Pay Auctions
|Autor:||Aniol Llorente-Saguer, Roman M. Sheremeta und Nora Szech