We experimentally examine perfectly discriminating contests under three valuation structures: pure common-value, pure private-value and a case with both private and common value components. In line with the results from the previous literature, we find that, regardless of valuation structure, contestants often choose very conservative expenditures, and very aggressive expenditures. Average expenditures exceed Nash equilibrium predictions. In valuation structures with a common value component, contestants often choose expenditures in excess of the expected value of the prize conditional on winning the contest. That is, they often guarantee themselves negative payoffs in expectation.
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Affiliation is a notion of positive dependence between random variables, which is often assumed in the auction literature. See e.g., Milgrom and Weber (1982).
Hayek (1945) famously notes: “...the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” While Hayek was speaking about the information that would be required by a social planner, we feel that the argument also applies to how the information regarding the value of a prize is likely to be distributed among contestants.
An interesting avenue for future research would be to experimentally examine environments wherein the weights are not equal, or wherein uncertainty exists about the relative weights.
See the online supplement of this article for a detailed review of the literature regarding contests (both perfectly and imperfectly discriminating) with private information.
The currency in Guatemala is the Quetzal, and this is how subjects were paid.
No participants went bankrupt.
n.s. indicates that a test is not significant at conventional levels.
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Financial support from Gettysburg College is gratefully acknowledged. Thanks also to Jorge Chang Urrea for outstanding research assistance. We have benefited from comments and suggestions from participants in seminars at Universidad Francisco Marroquín, the International ESA Conference, and the International Conference on Game Theory at Stony Brook.
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Aycinena, D., Baltaduonis, R. & Rentschler, L. Valuation structure in incomplete information contests: experimental evidence. Public Choice 179, 195–208 (2019). https://doi.org/10.1007/s11127-018-0568-7
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