RENT-SEEKING WITH BOUNDED RATIONALITY - AN ANALYSIS OF THE ALL-PAY AUCTION

The winner-take-all nature of all-pay auctions makes the outcome sensi tive to decision errors, which we introduce with a legit formulation. The equilibrium bid distribution is a fixed point: the belief distribu tions that determine expected payoffs equal the choice distributions d etermined by expected payoffs. We prove existence, uniqueness, and sym metry properties. In contrast to the Nash equilibrium, the comparative statics of the legit equilibrium are intuitive: rent dissipation incr eases with the number of players and the bid cost. Overdissipation of rents is impossible under full rationality but is observed in laborato ry experiments. Our model predicts this property.