Fighting for Lemons: The Encouragement Effect in Dynamic Competition with Private Information
In a common value environment with multi-stage competition, losing a battle conveys positive news about a rival's estimation of a contested prize, capable of balancing the discouraging effect of falling behind. We show that, due to this encouragement effect, aggregate incentives under private information must be higher than under public information and can even exceed the benchmark associated with static competition. By challenging the common wisdom that incentives become undermined by the dynamic nature of competition, our results have implications for our understanding of R&D races, promotion tournaments, or presidential primaries.