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Investment and endogenous efficiency in a contest

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  • Clark, Derek J.
  • Kundu, Tapas
  • Nilssen, Tore

Abstract

Contests are ubiquitous but do not happen in a vacuum. Rivals can prepare themselves for the contest to improve their ultimate chance of victory. Two contestants with different prize values play an all-pay auction and can invest to improve the efficiency of their own effort in the contest. We show that at most one player will invest, and that two asymmetric pure-strategy equilibria exist depending upon the identity of the investor. If the high-value player invests, then investment reinforces the initial asymmetry; investment by the low-value player turns the tables on the initially advantaged rival. The investment opportunity moves competition away from the contest, resulting in less expected contest effort than would occur without investment.

Suggested Citation

  • Clark, Derek J. & Kundu, Tapas & Nilssen, Tore, 2025. "Investment and endogenous efficiency in a contest," Economics Letters, Elsevier, vol. 247(C).
    • Handle: RePEc:eee:ecolet:v:247:y:2025:i:c:s0165176524006153
    DOI: 10.1016/j.econlet.2024.112131
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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