Endogenous interdependent preferences in a dynamical contest model

Abstract

Outcomes observed in laboratory experiments on contests are often not consistent with the results expected by theoretical models, with phenomena that frequently occur like overbidding and, less frequently, underbidding, and persisting oscillations in strategic choices. Several explanations have been suggested to understand such phenomena, dealing primarily with equilibrium analysis. We propose a dynamical model based on the coevolution of strategic choices and agent preferences. Each agent can have non self-interested preferences, which influence strategic choices and in turn evolve according to them. We show that multiple coexisting steady states characterized by non self-interested preferences can exist, and they lose stability as the prize increases, leading to endogenous oscillating dynamics. Finally, with an emphasis on two specific kinds of agents, we explain how overbidding can emerge. The numerical results show a good qualitative agreement with the experimental data. The model and the analysis of this paper are interesting not only to explain real life phenomena observed in experimental settings, but also as a methodological contribution to analyze the interplay between preferences and choices in conflict situations.