The Effects of Loss Aversion and Sunk Cost Sensitivity in All-Pay Auctions for Charity

Abstract

All-pay auctions have demonstrated an extraordinary ability at raising money for charity. One mechanism in particular is the war of attrition, which frequently generates revenue well beyond what is theoretically predicted with rational bidders. However, what motivates the behavioral response in bidders remains unclear. By imposing charity auction incentives in the laboratory, this paper uses controlled experiments to consider the effects of loss aversion and sunk cost sensitivity on bidders’ willingness to contribute. The results indicate that revenues in incremental bidding mechanisms, such as the war of attrition, rely heavily on bidders who are sunk cost sensitive. It is shown this behavioral response can be easily curbed with a commitment device which drastically lowers contributions below theoretical predictions. A separate behavioral response due to loss aversion is found in the sealed-bid first-price all-pay auction, which reduces bidders’ willingness to contribute. These findings help explain the inconsistencies in revenues from previous all-pay auction studies and indicate a mechanism preference based on the distribution of these behavioral characteristics.