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CeDEx 2016-05: Reputational Concerns in Repeated Rent-Seeking Contests

Reputational Concerns in Repeated Rent-Seeking Contests

Summary

In rent-seeking contests agents spend costly resources in order to win a price. Examples include political races and lobbying, sports competitions, tournament incentives in firms or grant seeking contests. In many of these settings contestants compete repeatedly against the same set of opponents (for example in sport contests like Formula 1). In other cases, the set of opponents changes from contest to contest (for example in some grant-seeking competitions). An open question is whether and how the type of repetition affects contestants' behaviour. If contestants interact repeatedly with the same opponents they might, for example, attempt to cooperate on collusive outcomes and reciprocal or reputational concerns might affect contestant’s choices. The impact of such concerns however, might also crucially depend on the feedback available to competitors. In some contests (like in many grant seeking competitions) competitors only learn whether their own bid was successful, but receive no feedback about their opponents' contest expenditures or earnings. In such low information environments it is difficult for competitors to signal willingness to collude or to interpret others’ past behaviour as aggressive or cooperative.

In this Nottingham School of Economics working paper Elke Renner and Francesco Fallucchi use controlled laboratory experiments to examine how the type of repetition affects contest behaviour and how it interacts with information feedback. They find no evidence of successful collusion, irrespective of information feedback. However, when participants only observe their own earnings at the end of each contest they are significantly more aggressive when they interact in fixed groups. This result can be explained by a dominance or status seeking motive. Without feedback, the only measure contestants can employ to compare their own performance with that of their rivals is their past winning record. Competitors in fixed groups seem strongly concerned about their recent success rate: they are stepping up their expenditures if their winning rate does not keep up with that of their rivals and they do so, even if they would be better off not competing.

CeDEx Discussion Paper 2016-05, Reputational Concerns in Repeated Rent-Seeking Contests by Francesco Fallucchi and Elke Renner

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Authors

Francesco Fallucchi and Elke Renner

 

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Posted on Tuesday 26th April 2016

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