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Efficiency and competition in the long run: The survival of the unfit

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  • Virág, Gábor

Abstract

In a dynamic contest the current incumbent competes against a randomly assigned entrant in a private value all pay auction each period. We focus on equilibria where the beliefs about the incumbent's type and the employed strategies are stationary. We show that inefficient types survive, even if the entrants arrive very frequently, because the entrant plays more aggressively than the incumbent, allowing a low type entrant to win against a high type incumbent. In an example we show that if the incumbent is challenged more often, then the equilibrium type of the incumbent is higher on average. When the value of the prize is the same for all players (the case studied in the public choice literature), the equilibrium rent of the bidders is fully dissipated as the incumbent is challenged infinitely often. The technical contribution lies in showing the existence of stationary equilibrium in an incomplete information game.

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 67 (2009)
Issue (Month): 1 (September)
Pages: 315-330

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Handle: RePEc:eee:gamebe:v:67:y:2009:i:1:p:315-330

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Web page: http://www.elsevier.com/locate/inca/622836

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Keywords: Dynamic contests Rent dissipation Dynamic auctions Dynamic efficiency;

References

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  1. Amann, Erwin & Leininger, Wolfgang, 1996. "Asymmetric All-Pay Auctions with Incomplete Information: The Two-Player Case," Games and Economic Behavior, Elsevier, vol. 14(1), pages 1-18, May.
  2. Michael R. Baye & Dan Kovenock & Casper G. de Vries, 1997. "The Incidence of Overdissipation in Rent-Seeking Contests," Tinbergen Institute Discussion Papers 97-045/2, Tinbergen Institute.
  3. Engelbrecht-Wiggans, Richard & Milgrom, Paul R. & Weber, Robert J., 1983. "Competitive bidding and proprietary information," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 161-169, April.
  4. Katzman, Brett, 1999. "A Two Stage Sequential Auction with Multi-Unit Demands," Journal of Economic Theory, Elsevier, vol. 86(1), pages 77-99, May.
  5. Mehlum, Halvor & Moene, Karl, 2005. "Fighting against the odds," Memorandum 03/2005, Oslo University, Department of Economics.
  6. repec:wop:humbsf:2000-72 is not listed on IDEAS
  7. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
  8. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  9. Jofre-Bonet, Mireia & Pesendorfer, Martin, 2000. "Bidding behavior in a repeated procurement auction: A summary," European Economic Review, Elsevier, vol. 44(4-6), pages 1006-1020, May.
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