Masiliunas, Aidas Mengel, Friederike Reiss, J. Philipp
Year of Publication:
Working Paper Series in Economics, Karlsruher Institut für Technologie (KIT) 55
We conduct an experiment to uncover the reasons behind the typically large behavioral variation and low explanatory power of Nash equilibrium observed in Tullock contests. In our standard contest treatment, only 7% of choices are consistent with Nash equilibrium which is in line with the literature and roughly what random (uniform) choice would predict (6.25%). We consider a large class of social, risk and some other non-standard preferences and show that heterogeneity in preferences cannot explain these results. We then systematically vary the complexity of both components of Nash behaviour: (I) the difficulty to form correct beliefs and (II) the difficulty to formulate best responses. In treatments where both the difficulty of forming correct beliefs and of formulating best responses is reduced behavioural variation decreases substantially and the explanatory behaviour of Nash equilibrium increases dramatically (explaining 65% of choices with a further 20% being close to NE). Our results show that bounded rationality rather than heterogeneity in preferences is the reason behind the huge behavioral variation typically observed in Tullock contests.