contests empirical and theoretical frameworks october 29, 2007
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ContestsEmpirical and Theoretical FrameworksOctober 29, 2007
2Neil Thompson & Sharat Raghavan – Oct 29, 2007
We examine specific types of games
Games
Ordinal Games (Contests)
Cardinal Games
Indivisible prizes Divisible prizes
Must participate Can opt out
Choice of effort / cost
No choice of effort / cost
Choice of effort / cost
No choice of effort / cost
• Ranking determines prize allocation
• Often simplify to 1-person games
Efficiency of effort choices (Nitzan)
War of Attrition / Timing of Exits (Bulow and Klemperer)
Impact of superstar player types (Brown)
1
3
2
3Neil Thompson & Sharat Raghavan – Oct 29, 2007
Examples of the key types of ordinal games
Must participate Can opt out
Choice of effort / cost
No choice of effort / cost
Choice of effort / cost
No choice of effort / cost
•Sports tournaments (basketball, golf, etc.)
•General Electric reward schemes
•20% up•70% flat•10% down
•University of Chicago PhD entrance policies
•Accept many, then weed out
•Door prize lotteries
•Random screenings at Customs
•“Look under the cap to win” soft drink promotions
•Oligopoly price wars
•Media / Public on President Bush re: Departure of Alberto Gonzales
•Standards competition
•HDTV•Cell phone technology
•“We’re here until I get 5 volunteers” problems
4Neil Thompson & Sharat Raghavan – Oct 29, 2007
We examine specific types of games
Games
Ordinal Games (Contests)
Cardinal Games
Indivisible prizes Divisible prizes
Must participate Can opt out
Choice of effort / cost
No choice of effort / cost
Choice of effort / cost
No choice of effort / cost
• Ranking determines prize allocation
• Often simplify to 1-person games
Efficiency of effort choices (Nitzan)
War of Attrition / Timing of Exits (Bulow and Klemperer)
Impact of superstar player types (Brown)
1
3
2
5Neil Thompson & Sharat Raghavan – Oct 29, 2007
Nitzan’s Survey of Rent-Seeking Contests• Nitzan analyzes strategic “winner take all” contests
to measure social waste in rent seeking
• Basic assumptions:- (i) contest is an N-player strategic game, N≥2- (ii) contested rent is indivisible, ie “winner takes all”- (iii) players expend effort to increase chances of winning
• Several extensions are introduced to model the effects of various constraints or modifications on the base model
• The practical importance of measuring social waste or “rent dissipation” is critical for policy makers, firms or individuals in a rent seeking contest
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6Neil Thompson & Sharat Raghavan – Oct 29, 2007
Base Model: Focus on Rent Dissipation
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• N agents, R contestable rent, rent seeker i, effort level xi (same units as R) - Probability of winning R:
Where: and Vi is rent seeker i’s payoff or expected utility
- Ratio D is the relationship between total rent seeking expenditure and the value of the contested rent R This is the crux of Nitzan’s paper – analyzing the change
in the ratio by modifying the base model- Nitzan assumes two equilibriums (pure and mixed
strategies) D= and D=
• Contests depend on the number and characteristics of the players, their endowments and preferences
7Neil Thompson & Sharat Raghavan – Oct 29, 2007
Base Model: Symmetry and Risk Neutrality
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• Tullock (1980) formally introduces symmetry and risk neutrality to rent seeking contests- “Seminal contribution” – r > 0 where r is the marginal
rate of lobbying outlays and the assumption that identical rent seekers are risk neutral
- where
- Rent dissipation increasing as the number of players increase and in the parameter r
- Symmetry and risk neutrality imply that the rent is fully dissipated even when number of players is small
- When can we see incomplete rent dissipation? Risk aversion, uncertainty, heterogeneity of players
8Neil Thompson & Sharat Raghavan – Oct 29, 2007
Reducing Rent Dissipation – Model Extensions
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Risk Aversion Increases R in equilibrium above the R for risk neutral players
Risk aversion causes players to demand more R in equilibrium, so dissipation is reduced
Asymmetry Asymmetric information causes players to have different valuations of R
Players with lower valuations lay out less expenditures, so dissipation is reduced
Uncertain Rents Positive probability that nobody wins R, so expected value of R is less than the actual prize
Dissipation is reduced because valuation / expected value of R is lower than R
Source of Rent Internal sources (ie losers pay rent) vs. external sources of rent changes lobbying expenditures
Dissipation can be reduced because lobbying efforts are decreased (Schmidt 1992)
Nature of Competitors Groups of players competing for rent creates free riding incentives and decreases number of players
The free riding incentive and smaller contest decreases rent dissipation
Change to BaseModification Insight
9Neil Thompson & Sharat Raghavan – Oct 29, 2007
Reducing Rent Dissipation – Model Extensions
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Nature of Rent Rents that are public goods tend to decrease expenditures relative to the value to a specific player
Public goods reduce dissipation among rent seekers
Nature of Rent-setter Rents that are set by committees create high thresholds for player participation
Dissipation is lowered because of higher participation thresholds and attempts to economize expenditures
Nature of Contest Contests can be modified by creating dynamic games with alternating moves
Leininger, Yang, Baik, and Shogren show that collusion and subgames lower rent dissipation
Multiple Rent Contests Certain scenarios enable players to evaluate multiple rent objects as one prize
Research is ongoing on how these contests affect dissipation
Endogenous Rent Contest Endogenous participants, rents, parameters and order of moves can affect dissipation
Research points to a reduction of rent dissipation is many of these scenarios
Change to BaseModification Insight
10Neil Thompson & Sharat Raghavan – Oct 29, 2007
We examine specific types of games
Games
Ordinal Games (Contests)
Cardinal Games
Indivisible prizes Divisible prizes
Must participate Can opt out
Choice of effort / cost
No choice of effort / cost
Choice of effort / cost
No choice of effort / cost
• Ranking determines prize allocation
• Often simplify to 1-person games
Efficiency of effort choices (Nitzan)
War of Attrition / Timing of Exits (Bulow and Klemperer)
Impact of superstar player types (Brown)
1
3
2
11Neil Thompson & Sharat Raghavan – Oct 29, 2007
Bulow and Klemperer (1999):Contribution to the literature
• In situations of N prizes, they expand from the situation of N+1 participants to the N+k generalization
• Consider wars of attrition where the ‘cost’ of the war does not end when someone drops out, only when the overall war is over-In N+1 case this is trivial since they are the same-In N+k case it changes strategies
12Neil Thompson & Sharat Raghavan – Oct 29, 2007
Model
h(v) = f (v)1¡ F (v)
• N+k risk neutral firms
• Cost to Firms:- ‘Fighting’: 1 unit per period - ‘After exiting’: c > 0 per period
• N final firms playing receive a prize with value vi
-vi is private information-vi is drawn from a distribution F(v)
F(vL) = 0 ; F(vH) = 1 ; F(· ) has strictly positive finite derivative v Є (0,∞)
-Hazard rate:
• Restrict attention to perfect Bayesian equilibria
• Notation:-Time until a surviving firm exits: T (v ; vL, k)-Probability of being among the ultimate N survivors: P (v ; vL, k)
Note: this changes as firms drop out
13Neil Thompson & Sharat Raghavan – Oct 29, 2007
Building to the main result…
• Lemma 1: Firms with higher vi exit later-T (v ; vL, k) is strictly increasing in v for all vL and k
-P (v ; vL, k) is probability of being in N highest firms conditional on N+k-1 firms other firms have v > vL
• Lemma 2: There is at most one symmetric perfect-Baysian equilibrium of the game
-Waiting times are strictly determined by firm’s vi
• Lemma 3: Once only N+1 firms remain, the unique time until the game ends is:
- Intuitively, this comes from setting marginal cost (1 per unit of fighting time) equal to marginal benefit (Value of win * Prob someone else has vL < vi < v)
T(v;vL ;1) =
Z
v
v
L
Nxh(x)dx
14Neil Thompson & Sharat Raghavan – Oct 29, 2007
• The unique symmetric perfect-Bayesian equilibrium is:
• Why is this true?-The incremental cost of waiting for the next firm to leave is c multiplied by the amount of time it will take that person to leave
-The benefit is the increased probability of winning a prize-Iterate this from the k=2 case to kth case
The main result…
T(v;vL ;k) =
Z
v
v
L
N xh(x)dxck¡ 1
15Neil Thompson & Sharat Raghavan – Oct 29, 2007
• General Solution:
• If c=0, then all but N+1 firms exit immediately-Can also be derived from the RET for 2nd Price auctions-Notice: this is not strictly an equilibrium
• If c=1, the solution simplifies to the N+1 solution-Firms have no benefit from leaving early-They only consider the relative tradeoff between winning the prize and how their continuing increases game length
-“Strategic Independence”
Two special cases
T(v;vL ;k) =
Z
v
v
L
N xh(x)dxck¡ 1
16Neil Thompson & Sharat Raghavan – Oct 29, 2007
Exit timing
• The expected time between exits rises as fewer firms remain in the game
• Intuition (argument about the equilibrium):-Firms that remain have higher values for the prize (Lemma 1)
-To make them indifferent between staying / leaving the cost of staying must also rise
-Since costs are constant per unit time, the amount of time to the next exit must increase
17Neil Thompson & Sharat Raghavan – Oct 29, 2007
We examine specific types of games
Games
Ordinal Games (Contests)
Cardinal Games
Indivisible prizes Divisible prizes
Must participate Can opt out
Choice of effort / cost
No choice of effort / cost
Choice of effort / cost
No choice of effort / cost
• Ranking determines prize allocation
• Often simplify to 1-person games
Efficiency of effort choices (Nitzan)
War of Attrition / Timing of Exits (Bulow and Klemperer)
Impact of superstar player types (Brown)
1
3
2
18Neil Thompson & Sharat Raghavan – Oct 29, 2007
Summary: Adverse Incentive Effects of Competing with Superstars (Jennifer Brown)• Looks at the performance of golfers competing
for prizes
• Divides up her sample into exempt (higher quality) and non-exempt groups
• Separates out Tiger Woods “The Superstar”
• Compares each group’s performance when Tiger Woods is playing versus when he isn’t
19Neil Thompson & Sharat Raghavan – Oct 29, 2007
• Definitions:Prize, VProbabilities of winning: Cost of effort,
• Objective functions:
Player 1: Player 2:
FOC: FOC:
• Implications:
Model is symmetric in effort
¼1 = µe1µe1+e2
V ¡ e1 ¼2 = e2µe1+e2
V ¡ e2
0= µe2(µe1+e2)2 ¡ 1 0= µe2
(µe1+e2)2 ¡ 1
ei
= e2 = e¤= µ(1+µ)2 Ve1
de¤dµ = 1¡ µ
(µ+1)3 V < 0
e2µe1+e2
µe1µe1+e2
20Neil Thompson & Sharat Raghavan – Oct 29, 2007
Effort levels increase in prize size and decrease in the skill difference
= e2 = e¤= µ(1+µ)2 Ve1
21Neil Thompson & Sharat Raghavan – Oct 29, 2007
Brown – Econometric Specification and Results
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• Data set includes 363 PGA Events from 1999-2006- Hole by hole data available from 2002-2006 (important for
variance tests)- Model:- Independent variables include: Woods presence, exempt
status of a player (ie a top player) and controls for course and player attributes
- Expect that the final score (strokesij) of a player will be higher when Woods is playing
• Results verify hypothesis that there is a superstar effect that adversely affects performance- Exempt and non-exempt players score 0.8 strokes and 0.6
strokes higher when Tiger is playing in the same tournament
22Neil Thompson & Sharat Raghavan – Oct 29, 2007
• Selection Bias- Probit model used to analyze if players avoid tournaments in
which Woods plays or if they don’t make the cut in those events Results show no selection bias (e.g. exempt players are 0-2%
more likely to enter a tournament with Woods playing)
• Streaks and Slumps- Estimation used to measure affect of Woods’s slumps and
streaks, i.e. when he is playing below or above expectations Results illustrate that the superstar effect increases when
Woods is streaking and decreases when he is slumping
• Risky Strategies & Distraction- Players may play more aggressively when Woods is
participating or the extra media attention surrounding Woods could adversely affect others Round by round data reveal that players scoring variance (a
measure of “riskiness” is not different when Woods plays Woods popularity has grown, however, the coefficient of the
superstar effect has not increased over time
Brown – Robustness and Verification
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23Neil Thompson & Sharat Raghavan – Oct 29, 2007
Conclusion and Superstar Evidence
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• Research into contests and other rent seeking games provide a theoretical framework for analyzing many social, industrial and competitive events
• Nitzen provides a broad overview of rent seeking contests, focusing on how rent dissipation changes by modifying certain assumptions
• Bulow and Klemperer show how firms react in a war of attrition and provides empirical examples such as standard settings and political coalitions
• Brown uses the PGA tour and Tiger Woods as a vehicle for analyzing “the nature of competitors” as it relates to a superstar
• Finally, is Tiger Woods really a superstar…
24Neil Thompson & Sharat Raghavan – Oct 29, 2007
“If you saw this, you might not play as hard either…”
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