Damaging Conflict: All-pay Auctions with Negative Spillovers and Bimodal Bidding

Abstract

We investigate how the presence of a negative externality in an all-pay auction influences bidding behavior in the laboratory. In the standard risk-neutral model, Nash equilibrium predicts no difference in strategies between treatments with and without the externality. Our experimental results provide some support for this prediction, as average bids do not differ significantly across treatments and generally align with equilibrium benchmarks. However, bidding distributions in both treatments exhibit a pronounced bimodal pattern that is consistent with previous all-pay auction experiments but inconsistent with risk-neutral Nash predictions. To account for these features, we evaluate two models of bounded rationality: quantal response equilibrium (QRE) and noisy introspection, both incorporating prospect theory-inspired preferences. While both models can rationalize bimodal bidding, QRE provides the superior fit while also predicting the location of bid peaks across treatments. These results reinforce the growing evidence that while subjects may not mix strategies exactly as prescribed by Nash equilibrium, their bidding behavior remains broadly equilibrium-consistent. Our findings also support the role of reference dependence and loss aversion in explaining bimodal bidding and strategic behavior more generally.

Kristy Buzard

Associate Professor of Economics

My current research focuses on the formation and maintenance of international trade agreements, conflict resolution, and innovation. I am particularly interested in the impact of international institutions, government structure and domestic political pressure on the possibilities for cooperation.