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
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 bid-caps and favorable 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