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Rent Seeking with Bounded Rationality: An Analysis of the All-Pay Auction

In: 40 Years of Research on Rent Seeking 1

Author

Listed:
  • Simon P. Anderson

    (University of Virginia)

  • Jacob K. Goeree

    (University of Virginia)

  • Charles A. Holt

    (University of Virginia)

Abstract

The winner-take-all nature of all-pay auctions makes the outcome sensitive to decision errors, which we introduce with a logit formulation. The equilibrium bid distribution is a fixed point: the belief distributions that determine expected payoffs equal the choice distributions determined by expected payoffs. We prove existence, uniqueness, and symmetry properties. In contrast to the Nash equilibrium, the comparative statics of the logit equilibrium are intuitive: rent dissipation increases with the number of players and the bid cost. Overdissipation of rents is impossible under full rationality but is observed in laboratory experiments. Our model predicts this property.

Suggested Citation

  • Simon P. Anderson & Jacob K. Goeree & Charles A. Holt, 1998. "Rent Seeking with Bounded Rationality: An Analysis of the All-Pay Auction," Springer Books, in: Roger D. Congleton & Arye L. Hillman & Kai A. Konrad (ed.), 40 Years of Research on Rent Seeking 1, pages 225-250, Springer.
    • Handle: RePEc:spr:sprchp:978-3-540-79182-9_13
    DOI: 10.1007/978-3-540-79182-9_13
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    References listed on IDEAS

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    1. Davis, Douglas D. & Holt, Charles a., 1993. "Experimental economics: Methods, problems and promise," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 8(2), pages 179-212.
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    4. Arye Hillman & Dov Samet, 1987. "Dissipation of contestable rents by small numbers of contenders," Public Choice, Springer, vol. 54(1), pages 63-82, January.
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    6. Rosenthal, Robert W, 1989. "A Bounded-Rationality Approach to the Study of Noncooperative Games," International Journal of Game Theory, Springer;Game Theory Society, vol. 18(3), pages 273-291.
    7. Sharif Mohammad & John Whalley, 1984. "Rent Seeking in India: Its Costs and Policy Significance," Kyklos, Wiley Blackwell, vol. 37(3), pages 387-413, August.
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