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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. Dan Kovenock & Michael R. Baye & Casper G. de Vries, 1996. "The all-pay auction with complete information (*)," Economic Theory, Springer, vol. 8(2), pages 291-305.
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    • Gul, Faruk & Pesendorfer, Wolfgang, 2010. "The War of Information," Papers 9-13-2010, Princeton University, Research Program in Political Economy.
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  7. Andreas Park & Lones Smith, 2008. "Caller Number Five and Related Timing Games," Working Papers tecipa-317, University of Toronto, Department of Economics.
  8. 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.
  9. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  10. Lones Smith & Giuseppe Moscarini, 2007. "Optimal Dynamic Contests," 2007 Meeting Papers 249, Society for Economic Dynamics.
  11. Arye Hillman & Dov Samet, 1987. "Dissipation of contestable rents by small numbers of contenders," Public Choice, Springer, vol. 54(1), pages 63-82, January.
  12. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
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