No. 796: Designing Contests Between Heterogeneous Contestants: An Experimental Study of Tie-Breaks and Bid-Caps in All-Pay Auctions
Aniol Llorente-Saguer Queen Mary University of London Roman M. Sheremeta Case Western Reserve University and Chapman University Nora Szech Karlsruhe Institute of Technology, WZB, and CESifo Institute
May 20, 2016
Abstract
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 favouring weaker contestants through bid-caps and favourable tie-breaking rules can reduce the discouragement effect and increase the designer's revenue. We test these predictions in an experiment. Our data show that indeed, strengthening weaker contestants through tie-breaks and bid-caps significantly diminishes the discouragement effect. Bid-caps can also improve revenue. Most deviations from Nash equilibrium can be explained by the level-k model of reasoning.
J.E.L classification codes: C72, C91, D72
Keywords: All-pay auction, Rent-seeking, Bid-caps, Tie-breaks, Contest design