To Tender or Not to Tender? Deliberate and Exogenous Sunk Costs in a Public Good Game

Florian Heine,Martin Sefton

doi:10.3390/g9030041

Abstract

In an experimental study, we compare individual willingness to cooperate in a public good game after an initial team contest phase. While players in the treatment setup make a conscious decision on how much to invest in the contest, this decision is exogenously imposed on players in the control setup. As such, both groups of players incur sunk costs and enter the public good game with different wealth levels. Our results indicate that the way these sunk costs have been accrued matters especially for groups on the losing side of the contest: Given the same level of sunk costs, contributions to the public good are lower for groups which failed to be successful in the preceding between-group contest. Furthermore, this detrimental effect is more pronounced for individuals who play a contest with deliberate contributions before.

Highlights

In economics and in society in general, many situations are of a competitive kind
In this paper we present an experimental study to investigate the effect of a first-stage investment on agents’ willingness to contribute to a public good
A potential additional group of related literature combines exogenous-prize contests with public goods games, where players simultaneously play in both games [10,11]

Summary

Introduction

In economics and in society in general, many situations are of a competitive kind. For example in public tenders, (cellular telephone) license lotteries or struggles for resources, considerable funds are spent to outperform a competitor. One of the most widely used models for (team) competition is the contest game [1,2], where agents invest resources in order to influence the probability to win a prize. Public procurement procedures for legal aid providers in the UK illustrate a related application: Legal firms enter a tendering process for duty provider contracts. While this represents an attractive business for legal enterprises, there is a considerable amount of firms operating without duty work. A potential additional group of related literature combines exogenous-prize contests with public goods games, where players simultaneously play in both games [10,11]

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Conclusion