CeDEx Discussion Paper No. 2008–13 Loss Aversion and Rent-Seeking: An Experimental Study

We report an experiment designed to evaluate the impact of loss aversion on rent-seeking contests. We find, as theoretically predicted, a negative relationship between rent-seeking expenditures and loss aversion. However, for any degree of loss aversion, levels of rent-seeking expenditure are higher than predicted. Moreover, we find that the effect of loss aversion becomes weaker with repetition of the contest. * I am indebted to my supervisors Martin Sefton, Klaus Abbink, Bouwe Dijkstra and Richard Cornes for their incredible support and valuable comments; their remarks influenced this study considerably. In addition, I am especially grateful to Chris Starmer for very useful suggestions on the experimental design. Thanks also to Ping Zhang, Xianghua Zhang and Bin Xiao for assistance in conducting the experiments. Funding of the experiments by the Centre for Decision Making and Experimental Research (CeDEx) of the University of Nottingham is gratefully acknowledged. I wish to thank Simon Gachter, Alex Possajennikov, Robin Cubitt and Daniel Seidmann, as well as participants at the CREED-CeDEx Workshop, Nottingham, 2005, and the Economic Science Association Asia-Pacific Regional Meeting, Hong Kong, 2006, for helpful and encouraging comments. Any errors remain my own.