Go for broke or play it safe? Dynamic competition with choice of variance
AbstractWe consider a differential game in which the joint choices of the two players influences the variance, but not the mean, of the one-dimensional state variable. We interpret this state variable as a summary of how far âaheadâ player 1 is in the game. At each moment in time, players receive a flow pay-off which is a continuous, monotonic and bounded function of the state variable. We show that a Markov Perfect Equilibrium exists and has the property that patient players chose to play it safe when sufficiently ahead and to take risks when sufficiently behind. We also provide a simple condition that implies both players choose risky strategies when neither one is too far ahead, a situation that ensures a dominant player emerges âquicklyâ.
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Bibliographic InfoArticle provided by RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 38 (2007)
Issue (Month): 3 (09)
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Other versions of this item:
- Anderson, Axel & Cabral, Luís M B, 2004. "Go For Broke or Play it Safe? Dynamic Competition with Choice of Variance," CEPR Discussion Papers 4249, C.E.P.R. Discussion Papers.
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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