Rent-Seeking in the Newsvendor Environment: Theory and Experiment

This study investigates a contest between two decision-makers facing the newsvendor problem when they are concerned not only with their expected pro…ts but also with the likelihood of winning a …xed bonus (either monetary or due to social comparison) for making a higher pro…t than the other player. To this end, we …rst develop a novel model of rent-seeking that has common features with canonical contest models widely used in the economics literature but is not reducible to them. We characterize the equilibria in the sequential- and simultaneous-move versions of the contest and …nd that in both cases equilibrium strategies resemble the "pull-to-center"eect consistently observed in experimental studies of individual decision-making in the newsvendor problem. Next, we conduct two experiments in order to test the hypothesis that such a contest may arise in the newsvendor environment even without any monetary incentives, purely as a result of social comparison, and explore a possibility to manipulate the intensity of the competition. Our data show that the competition may indeed emerge without any monetary reward for winning and that mitigating social comparison in this context is likely to be challenging. We hope this study may be of interest for both practicing managers and academics. First, it provides new insights into dierent rent-seeking scenarios, from inventory managers competing for a promotion within a company to hi-tech companies deciding how much to invest into a new technology. In particular, our analysis suggests that "encouraging"the top-performing employees to share the information about their decisions ("best-practices") is useful when the bonus is small but quickly results in a mediocre performance as the bonus increases. Our data also indicate that the competition may be able to overcome some individual decision biases leading to notoriously poor decisions, make decisions more homogeneous and improve their overall quality.