Excessive expenditure in two-stage contests: Theory and experimental evidence
Budget-constrained and financially motivated members of independent groups participated in a series of two-stage contests to win a single, commonly valued, and exogenously determined prize. We present and test an equilibrium model that, in addition to the utility of receiving the prize, incorporates 1) a non-pecuniary utility of winning each stage of the contest, and 2) allows for misperception of the probability of winning, which is determined by Tullock's contest success function. The equilibrium solution accounts for the major finding of excessive aggregate expenditures in stage 1 of the contest. We then test a Cognitive Hierarchy model that attributes individual differences in stage 1 expenditures to different levels of depth of reasoning. Although the explanatory power of this model is limited, it emphasizes the importance of the non-pecuniary utility of winning in accounting for the excessive stage 1 expenditures. © 2009 by Nova Science Publishers, Inc. All rights reserved.