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A contest success function with a rent-dependent dissipation rate

Author

Listed:
  • Normann Lorenz

    () (University of Trier)

Abstract

In this note a new contest success function is derived that results in investments in equilibrium that are proportional to the square of the rent, which implies a dissipation rate that is not independent of, but increasing in the rent. Only for a contest success function with this property can it be optimal to use least squares regression models to determine transfers for a risk adjustment scheme (a regulatory means to reduce risk selection in health insurance markets). A second property of this new contest success function is that winning probabilities do not depend only on the ratio or only on the difference of investments, but on both the ratio and the difference; this may make it more suitable than common contest success functions for some situations like corruption or getting tenure at a university.

Suggested Citation

  • Normann Lorenz, 2014. "A contest success function with a rent-dependent dissipation rate," Economics Bulletin, AccessEcon, vol. 34(2), pages 1091-1102.
  • Handle: RePEc:ebl:ecbull:eb-14-00059
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2014/Volume34/EB-14-V34-I2-P101.pdf
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    References listed on IDEAS

    as
    1. Konrad, Kai A., 2009. "Strategy and Dynamics in Contests," OUP Catalogue, Oxford University Press, number 9780199549603.
    2. Michael R. Baye & Dan Kovenock & Casper G. Vries, 2005. "Comparative Analysis of Litigation Systems: An Auction-Theoretic Approach," Economic Journal, Royal Economic Society, vol. 115(505), pages 583-601, July.
    3. Stergios Skaperdas, 1996. "Contest success functions (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 283-290.
    4. Jack Hirshleifer, 1989. "Conflict and rent-seeking success functions: Ratio vs. difference models of relative success," Public Choice, Springer, vol. 63(2), pages 101-112, November.
    5. Stefan Szymanski, 2003. "The Economic Design of Sporting Contests," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1137-1187, December.
    6. Normann Lorenz, 2014. "Using quantile regression for optimal risk adjustment," Research Papers in Economics 2014-11, University of Trier, Department of Economics.
    7. Garfinkel, Michelle R. & Skaperdas, Stergios, 2007. "Economics of Conflict: An Overview," Handbook of Defense Economics, Elsevier.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Contest; dissipation rate; risk selection;

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D0 - Microeconomics - - General

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