Contests with Investment

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Contests with Investment

Author Info

Johannes Münster (Free University Berlin and Social Science Research Center Berlin (WZB), Reichpietschufer 50, 10785 Berlin, Germany, Telephone: +49 30 25491 410, Fax: +49 30 25491 400, E-mail: muenster@wz-berlin.de)

Abstract

Perfectly discriminating contests (or all pay auction) are widely used as a model of situations where individuals devote resources to win some prize. In reality such contests are often preceded by investments of the contestants into their ability to fight in the contest. This paper studies a two stage game where in the first stage, players can invest to lower their bid cost in a perfectly discriminating contest, which is played in the second stage. Different assumptions on the timing of investment are studied. With simultaneous investments, equilibria in which players play a pure strategy in the investment stage are asymmetric, exhibit incomplete rent dissipation, and expected effort is reduced relative to the game without investment. There also are symmetric mixed strategy equilibria with complete rent dissipation. With sequential investment, the first mover always invests enough to deter the second mover from investing, and enjoys a first mover advantage. I also look at unobservable investments and endogenous timing of investments.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 120.

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Date of creation: May 2006
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Handle: RePEc:trf:wpaper:120

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-06-17 (All new papers)
NEP-CDM-2006-06-17 (Collective Decision-Making)

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