Efficiency and competition in the long run: The survival of the unfit
In a dynamic contest the current incumbent competes against a randomly assigned entrant in a private value all pay auction each period. We focus on equilibria where the beliefs about the incumbent's type and the employed strategies are stationary. We show that inefficient types survive, even if the entrants arrive very frequently, because the entrant plays more aggressively than the incumbent, allowing a low type entrant to win against a high type incumbent. In an example we show that if the incumbent is challenged more often, then the equilibrium type of the incumbent is higher on average. When the value of the prize is the same for all players (the case studied in the public choice literature), the equilibrium rent of the bidders is fully dissipated as the incumbent is challenged infinitely often. The technical contribution lies in showing the existence of stationary equilibrium in an incomplete information game.
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- Eric Maskin & John Riley, 2000. "Asymmetric Auctions," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 413-438.
- Baye, Michael R & Kovenock, Dan & de Vries, Casper G, 1999.
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- Amann, Erwin & Leininger, Wolfgang, 1996. "Asymmetric All-Pay Auctions with Incomplete Information: The Two-Player Case," Games and Economic Behavior, Elsevier, vol. 14(1), pages 1-18, May.
- Halvor Mehlum & Karl Moene, 2006. "Fighting against the odds," Economics of Governance, Springer, vol. 7(1), pages 75-87, 01.
- Mehlum, Halvor & Moene, Karl, 2005. "Fighting against the odds," Memorandum 03/2005, Oslo University, Department of Economics.
- Katzman, Brett, 1999. "A Two Stage Sequential Auction with Multi-Unit Demands," Journal of Economic Theory, Elsevier, vol. 86(1), pages 77-99, May.
- Jofre-Bonet, Mireia & Pesendorfer, Martin, 2000. "Bidding behavior in a repeated procurement auction: A summary," European Economic Review, Elsevier, vol. 44(4-6), pages 1006-1020, May. Full references (including those not matched with items on IDEAS)
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