Aniol Llorente-Saguer, Roman M. Sheremeta, Nora Szech

European Economic Review, Vol. 154; 2023;

DOI: https://doi.org/10.1016/j.euroecorev.2022.104327

Abstract: A well-known theoretical result in the contest literature is that greater heterogeneity decreases investments of contestants because of the “discouragement effect.” Levelling the playing field by favouring weaker contestants through strict bid-caps and favourable 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 favourable tie-breaking rules significantly diminishes discouragement of weaker contestants. However, its impact on revenues is muted by the fact that the encouragement of weaker contestants is offset by stronger contestants competing less aggressively, even when not predicted by theory. We discuss deviations from the Nash predictions in light of different behavioural approaches.