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Transitional Dynamics in a Tullock Contest with a General Cost Function

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  • Grossmann Martin

    ()
    (University of Zurich)

  • Lang Markus

    ()
    (University of Zurich)

  • Dietl Helmut

    ()
    (University of Zurich)

Abstract

This paper constructs and analyzes open-loop equilibria in an infinitely repeated Tullock contest in which two contestants contribute efforts to accumulate individual asset stocks over time. To investigate the transitional dynamics of the contest in the case of a general cost function, we linearize the model around the steady state. Our analysis shows that optimal asset stocks and their speed of convergence to the steady state crucially depend on the elasticity of marginal effort costs, the discount factor and the depreciation rate. In the case of a cost function with a constant elasticity of marginal costs, a lower discount factor, a higher depreciation rate and a lower elasticity imply a higher speed of convergence to the steady state. We further analyze the effects of second prizes in the contest. A higher prize spread increases individual and aggregate asset stocks, but does not alter the balance of the contest in the long run. During the transition, a higher prize spread increases asset stocks, produces a more balanced contest in each period and increases the speed of convergence to the steady state.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 11 (2011)
Issue (Month): 1 (August)
Pages: 1-26

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Handle: RePEc:bpj:bejtec:v:11:y:2011:i:1:n:17

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Cited by:
  1. Martin Grossmann, 2011. "Endogenous Liquidity Constraints in a Dynamic Contest," Working Papers 0148, University of Zurich, Institute for Strategy and Business Economics (ISU).

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