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Risk-Bearing in a Winner-Take-All Contest

Author

Listed:
  • Dimitry Rtischev

Abstract

A parsimonious model is used to explore the risk-bearing decision under a payoff structure that emphasizes relative performance. Equilibrium betting amounts are derived for players starting with unequal endowments and facing a lottery that offers either a positive or negative expected return. If the lottery offers negative expected return, disadvantaged players are willing to risk a portion of their endowment, and this induces advantaged players to also gamble, defensively. Although there are equilibria in which the advantaged preemptively gamble more than the disadvantaged, in the robust equilibrium it is the disadvantaged who make the larger bets. If the lottery offers positive expected return, there are equilibria in which the advantaged invest less than the disadvantaged, but full investment by all players is a more robust equilibrium.

Suggested Citation

  • Dimitry Rtischev, 2008. "Risk-Bearing in a Winner-Take-All Contest," Gakushuin Economic Papers, Gakushuin University, Faculty of Economics, vol. 45(1), pages 65-79.
    • Handle: RePEc:abc:gakuep:45-1-3
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    File URL: http://www.gakushuin.ac.jp/univ/eco/gakkai/pdf_files/keizai_ronsyuu/contents/4501/4501rtischev.pdf
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    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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