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Gambling in contests

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  • Seel, Christian
  • Strack, Philipp
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    Abstract

    This paper presents a strategic model of risk-taking behavior in contests. Formally, we analyze an n-player winner-take-all contest in which each player decides when to stop a privately observed Brownian motion with drift. A player whose process reaches zero has to stop. The player with the highest stopping point wins. Unlike the explicit cost for a higher stopping time in a war of attrition, here, higher stopping times are riskier, because players can go bankrupt. We derive a closed-form solution of a Nash equilibrium outcome. In equilibrium, highest expected losses occur at an intermediate negative value of the drift.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 148 (2013)
    Issue (Month): 5 ()
    Pages: 2033-2048

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    Handle: RePEc:eee:jetheo:v:148:y:2013:i:5:p:2033-2048

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    Web page: http://www.elsevier.com/locate/inca/622869

    Related research

    Keywords: Discontinuous games; Contests; Relative performance pay; Risk-taking behavior;

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    References

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    1. Harris, Christopher & Vickers, John, 1987. "Racing with Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 1-21, January.
    2. Baye, M.R. & Kovenock, D. & De Vries, C.G., 1991. "The All-Pay Auction With Complete Information," Purdue University Economics Working Papers 1007, Purdue University, Department of Economics.
    3. Hans K. Hvide, 2000. "Tournament Rewards and Risk Taking," Econometric Society World Congress 2000 Contributed Papers 0163, Econometric Society.
    4. Andreas Park & Lones Smith, 2008. "Caller Number Five and Related Timing Games," Working Papers tecipa-317, University of Toronto, Department of Economics.
    5. 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.
    6. Arye Hillman & Dov Samet, 1987. "Dissipation of contestable rents by small numbers of contenders," Public Choice, Springer, vol. 54(1), pages 63-82, January.
    7. Faruk Gul & Wolfgang Pesendorfer, 2012. "The War of Information," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 707-734.
    8. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
    9. Fudenberg, Drew & Tirole, Jean, 1986. "A Theory of Exit in Duopoly," Econometrica, Econometric Society, vol. 54(4), pages 943-60, July.
    10. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
    11. Lones Smith & Giuseppe Moscarini, 2007. "Optimal Dynamic Contests," 2007 Meeting Papers 249, Society for Economic Dynamics.
    12. Pedersen, J. L. & Peskir, G., 2001. "The Azéma-Yor embedding in non-singular diffusions," Stochastic Processes and their Applications, Elsevier, vol. 96(2), pages 305-312, December.
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    Cited by:
    1. Lang, Matthias & Seel, Christian & Strack, Philipp, 2014. "Deadlines in stochastic contests," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 134-142.
    2. Han Feng & David Hobson, 2014. "Gambling in Contests with Random Initial Law," Papers 1405.7801, arXiv.org.

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