Fighting for Lemons: The Balancing Effect of Private Information on Incentives in Dynamic Contests
Abstract
Abstract In a common-value environment with multi-stage competition, losing a stage conveys positive news about a rival’s estimation of a contested prize, capable of balancing the discouraging effect of falling behind. We show that, due to players’ learning from stage outcomes, aggregate incentives under private information are often greater than under public information and may even exceed the static competition benchmark. Moreover, laggards can become more motivated than leaders, giving rise to long-lasting fights. Our results have implications for the duration of R&D races, the desirability of feedback in labour and procurement contests, and the campaign spending and selective efficiency of presidential primaries.