Loss Aversion in Contests

We study pure strategy Nash equilibria of rent-seeking contests in which contestants value gains less than losses of similar magnitude. We demonstrate that, if the degree of loss aversion is su¢ ciently great, there may be multiple equilibria, even for the simplest contest success functions and discuss condition which ensure uniqueness. We investigate comparative statics when these conditions are satis…fied. For symmetric contests, we establish that there is a unique symmetric equilibrium, derive an explicit expression for this equilibrium and show that, in the presence of other equilibria, the symmetric equilibrium may display perverse comparative statics. We use these results in a comparison of contests with divisible and indivisible prizes and conclude by drawing lessons for the design of experimental contests.