Abstract
This paper studies a multiple prize contest with expectation-based loss-averse contestants a la Kőszegi and Rabin (2006). The contest designer first decides on the prize structure - the number and the level of prizes - and contestants then simultaneously undertake costly efforts to win prizes. Each contestant has private information about his ability, affecting his cost-of-effort. Predictions of the model are able to align the empirical evidence on effort provision observed in recent laboratory experiments that is hard to reconcile with the standard economic assumptions. More specifically, I show that high-ability contestants overexert effort while low-ability contestants exert very little or no effort in comparison to predictions with standard preferences. Moreover, the optimal prize allocation in contests differs markedly in the presence of expectation-based loss aversion. In particular, I show that multiple prizes can be optimal in the cases where standard preferences predict the optimality of a single prize.
Original language | English |
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Publication status | Submitted - 2016 |
Keywords
- loss aversion
- reference dependent preferences
- contests
- all-pay
- prize allocation