Repeated contests with asymmetric information

The same contestants often meet repeatedly in contests. Behavior in a contest potentially provides information with regard to one’s type and can therefore in‡uence the behavior of the opponents in later contests. This paper shows that if e¤ort is observable, this can induce a ratchet e¤ect in contests: high ability contestants sometimes put in little e¤ort in an early round in order to make the opponents believe that they are of little ability. The e¤ect reduces overall e¤ort and increases equilibrium utility of the contestants when compared with two unrelated one-shot contests. It does, however, also introduce an allocative ine¢ ciency since sometimes a contestant with a low valuation wins. The model assumes an imperfectly discriminating contest (or lottery model); however, qualitatively results are similar in a perfectly discriminating contest (all pay auction). JEL codes: C72, D72, D74, D82, M52