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Gambling in contests

  • Seel, Christian
  • Strack, Philipp

This paper presents a strategic model of risk-taking behavior in contests. Formally, we analyze an n-player winner-take-all contest in which each player decides when to stop a privately observed Brownian motion with drift. A player whose process reaches zero has to stop. The player with the highest stopping point wins. Unlike the explicit cost for a higher stopping time in a war of attrition, here, higher stopping times are riskier, because players can go bankrupt. We derive a closed-form solution of a Nash equilibrium outcome. In equilibrium, highest expected losses occur at an intermediate negative value of the drift.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 148 (2013)
Issue (Month): 5 ()
Pages: 2033-2048

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Handle: RePEc:eee:jetheo:v:148:y:2013:i:5:p:2033-2048
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Faruk Gul & Wolfgang Pesendorfer, 2007. "The War of Information," Levine's Bibliography 321307000000000921, UCLA Department of Economics.
    • Gul, Faruk & Pesendorfer, Wolfgang, 2010. "The War of Information," Papers 9-13-2010, Princeton University, Research Program in Political Economy.
  2. Fudenberg, Drew & Tirole, Jean, 1986. "A Theory of Exit in Duopoly," Econometrica, Econometric Society, vol. 54(4), pages 943-60, July.
  3. Baye, M.R. & Kovenock, D. & De Vries, C.G., 1991. "The All-Pay Auction With Complete Information," Purdue University Economics Working Papers 1007, Purdue University, Department of Economics.
  4. Arye Hillman & Dov Samet, 1987. "Dissipation of contestable rents by small numbers of contenders," Public Choice, Springer, vol. 54(1), pages 63-82, January.
  5. Park, Andreas & Smith, Lones, 2008. "Caller Number Five and related timing games," Theoretical Economics, Econometric Society, vol. 3(2), June.
  6. Harris, Christopher & Vickers, John, 1987. "Racing with Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 1-21, January.
  7. Anderson, Axel & Cabral, Luís M B, 2004. "Go For Broke or Play it Safe? Dynamic Competition with Choice of Variance," CEPR Discussion Papers 4249, C.E.P.R. Discussion Papers.
  8. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  9. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  10. Pedersen, J. L. & Peskir, G., 2001. "The Azéma-Yor embedding in non-singular diffusions," Stochastic Processes and their Applications, Elsevier, vol. 96(2), pages 305-312, December.
  11. Hvide, H.K., 1999. "Tournament Rewards and Risk Taking," Papers 32-99, Tel Aviv.
  12. Lones Smith & Giuseppe Moscarini, 2007. "Optimal Dynamic Contests," 2007 Meeting Papers 249, Society for Economic Dynamics.
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