Behavior in Contests

Standard theoretical prediction is that rational economic agents participating in rent-seeking contests should engage in socially inefficient behavior by exerting costly efforts. Experimental studies find that the actual efforts of participants are significantly higher than predicted and that over-dissipation of rents (or overbidding or over-expenditure of resources) can occur. Although the standard theory cannot explain over-dissipation, this phenomenon can be explained by incorporating behavioral dimensions into the rent-seeking contest, such as (1) the utility of winning, (2) relative payoff maximization, (3) bounded rationality, and (4) judgmental biases. These explanations are not exhaustive, but they provide a coherent picture of important behavioral dimensions that should be considered when studying rent-seeking behavior in theory and in practice.