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Showing Off or Laying Low? The Economics of Psych-outs
Philipp Denter, John Morgan, and Dana Sisak
American Economic Journal: Microeconomics. Feb 2022, Vol. 14, No. 1: Pages 529-580

Showing Off or Laying Low? The Economics of Psych-outs

Philipp Denter1, John Morgan2 and Dana Sisak3

1Departamento de Economia, Universidad Carlos III de Madrid (email: )

2Haas School of Business, University of California, Berkeley (email: )

3Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute (email: )

Abstract

We analyze the incentives for showing off, which we model as a costly signaling game, and study the consequences of norms against such behavior. Prior to competing in a contest, a newcomer can signal his talent to an incumbent. In equilibrium, costly signaling of ability occurs only when the newcomer is exceptionally talented. In such situations signaling benefits both contestants: the newcomer for obvious reasons; the incumbent by economizing on wasted effort in the contest. Our results rationalize the emergence of norms against showing off in settings where total effort is important. When selection efficiency matters, such norms decrease welfare. (JEL D82, D83, D91, Z13)