Feedback in Dynamic Contests: Theory and Experiment

TL;DR

This paper analyzes how different feedback policies influence bidding behavior in a two-stage dynamic all-pay auction, combining theoretical equilibrium analysis with experimental validation.

Contribution

It introduces Cheapest Signal Equilibria for dynamic auctions and empirically tests the impact of various feedback policies on bidding behavior.

Findings

Equilibrium outcomes feature zero payoffs and total bids equal to the prize value.

Experimental results show deviations from equilibrium but no significant effect of feedback policies on total bids.

Stage 1 bids create sunk costs and head starts, affecting subsequent bidding behavior.

Abstract

We study the effect of interim feedback policies in a dynamic all-pay auction where two players bid over two stages to win a common-value prize. We show that sequential equilibrium outcomes are characterized by Cheapest Signal Equilibria, wherein stage 1 bids are such that one player bids zero while the other chooses a cheapest bid consistent with some signal. Equilibrium payoffs for both players are always zero, and the sum of expected total bids equals the value of the prize. We conduct an experiment with four natural feedback policy treatments -- full, rank, and two cutoff policies -- and while the bidding behavior deviates from equilibrium, we fail to reject the hypothesis of no treatment effect on total bids. Further, stage 1 bids induce sunk costs and head starts, and we test for the resulting sunk cost and discouragement effects in stage 2 bidding.