CeDEx workshop - Ted Turocy (University of East Anglia)

Quantal response equilibrium in contest games

Abstract:

We show that a structural model of noisy decision-making can explain overdissipation of rents in Tullock contest games, by systematically investigating the predictions of logit quantal response equilibrium (QRE). We put the theory to a robustness test using a new series of laboratory experiments in which the number of participants is varied. Our design addresses a critical gap in the existing literature, by asking whether QRE can organize observations across related games. We find that QRE fits the qualitative and quantitative properties of the distribution of subjects’ expenditures in all treatments. In particular, logit QRE predicts total expenditure exceeds the value of the prize even when there are few contestants, which is observed in our experiments. We estimate that the precision parameter of QRE decreases as the group size grows, so expected payoffs become less successful at explaining behavior relative to unobserved payoff shocks.