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Expectations-based loss aversion in contests

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  • NSTL
  • Elsevier
This paper studies a multi-player lottery contest in which heterogeneous contestants exhibit reference-dependent loss aversion a la Ko?szegi and Rabin (2006, 2007). We verify the existence and uniqueness of pure-strategy choice-acclimating personal Nash equilibrium (CPNE) under moderate loss aversion and fully characterize the equilibrium. The equilibrium sharply contrasts with that in the two-player risk-neutral symmetric case. Loss aversion can lead contestants' individual efforts to change nonmonotonically, while the total effort strictly decreases. Further, it always leads to a more elitist distributional outcome, in the sense that a smaller set of contestants remain active in the competition and stronger contestants' equilibrium winning probabilities increase. We demonstrate that loss aversion generates a fundamentally different decision problem than risk aversion and develop a rationale that explains the contrasting predictions from the two frameworks. Finally, our results are robust under the alternative equilibrium concept of preferred personal Nash equilibrium (PPNE). (C) 2022 Elsevier Inc. All rights reserved.

Loss aversionContestReference-dependent preferenceChoice-acclimating personal Nash equilibrium (CPNE)Preferred personal Nash equilibrium (PPNE)REFERENCE-DEPENDENT PREFERENCESRENT-SEEKINGRISK-AVERSIONPRICE-DISCRIMINATIONHETEROGENEITYEQUILIBRIUMEXISTENCEAUCTIONSMODEL

Fu, Qiang、Lyu, Youji、Wu, Zenan、Zhang, Yuanjie

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Natl Univ Singapore

Nankai Univ

Peking Univ

2022

10.1016/j.geb.2022.01.018

Games and economic behavior

Games and economic behavior

SSCI
ISSN：0899-8256
年,卷(期)：2022.133
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