Anmerkungen:
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Beschreibung:
Why do contests exist in settings where negotiation provides a costless alternative? I assess a new explanation: parties may be overconfident about their ability or optimistic about their chances of winning. For both parties in a contest, this hubris: (i) reduces the incentive to exit the contest; (ii) reduces effort; and(iii) increases expected payoffs. Whilst hubris leads to the contest being preferred to costless negotiation, the welfare loss is nonmonotonic in either behavioural bias.