The Persistence of Disadvantages: Theory and Experiment

Many economic situations involve contests for resources, such as winning prizes and earning bonuses. The likelihood of success in such contests is often skewed, favouring some competitors while putting others at a disadvantage. I study the strategic interaction between an advantaged and a disadvantaged competitor in a repeated contest where winning can help overcome the initial disadvantage. Theoretically, the competition for advantage increases effort by both competitors, but that the advantaged competitor increases effort more than the disadvantaged competitor. As a result, the disadvantaged competitor is even less likely to win when they have the potential to overcome their disadvantage, and the initial disadvantage is persistent. Evidence from a laboratory experiment supports these theoretical predictions.