Time Discounting in Strategic Contests

• Date: 01 March 2015
• Published date: 01 March 2015
• Author: Salar Jahedi,Cary Deck
• DOI: http://doi.org/10.1111/jems.12082

Time Discounting in Strategic Contests

CARY DECK

Department of Economics

University of Arkansas

Fayetteville, AR 72701-1201

cdeck@walton.uark.edu

SALAR JAHEDI

Economics, Sociology, and Statistics Department

RAND Corporation

Santa Monica, CA 90407-2138

sjahedi@rand.org

In many contests, such as political campaigns or R&D expenditures, there is at least some trade-

off between immediate money outlay and potential future benefits. This timing aspect has mostly

been ignored by the contest literature. If contestants exhibit a strong present bias, such as that

shown by past individual choice experiments, then benefits that are deferred to the future will lead

to a significant drop in investment. This paper uses controlled laboratory experiments to explore

how the timing of prize payment impacts behavior in a contest with a unique Nash equilibrium

strategy. We find no evidence that people significantly discount future prizes in our contests,

despite the fact that we do replicate present bias in a separate individual choice experiment.

1. Introduction

A sizable number of experiments about intertemporal choice find that people exhibit a

high degree of impatience in the short run. The high impatience level has been presented

as one reason for which drug and cigaretteaddictions occur, people are unhealthy in their

eating and exercise habits, and why there is undersaving for retirement. Thus far, the

majority of research on discounting has focused on individual decisions (see Andreoni

and Sprenger,2010, for a discussion). However, if people exhibit such impatience, this has

important implications on strategic interactions as well. This paper looks at discounting

in the interdependent setting of contests. Contests are quite prevalent in everyday life,

and can be used to model political campaigns, firm R&D investments, and advertising.

In contests, just as in many individual intertemporal decisions, an individual must incur

a cost prior to realizing a future benefit; however, the future benefit in contests will

depend on the action of others. Indeed, a substantial portion of our decisions are made

(and many market outcomes are determined) in interdependent settings like contests,

and it is important to verify whether discount rates are as large there as they are in

individual choice experiments.

In order to measure individual discount rates, respondents are generally asked a

series of binary choice questions that determine the amount mthat makes them indif-

ferent between receiving xtoday and x+min a future period. The evidence suggests

that beyond the traditional model of exponential discounting, people exhibit a taste for

Weare grateful to Roman Sheremeta, an anonymous reviewer, and a coeditor for their helpful comments. We

thank the Sutton Fund and the University of Arkansas for financial support.

C2015 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume24, Number 1, Spring 2015, 151–164