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Endogenous Liquidity Constraints in a Dynamic Contest

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  • Martin Grossmann

    () (Department of Business Administration, University of Zurich)

Abstract

In this article, I analyze the effects of future liquidity constraints on the investment behavior of two contestants with asymmetric prize valuations in a dynamic contest model. Contestants compete in two consecutive Tullock contests in order to win a contest prize in each period. The loser of the first-period contest can be liquidity constraint in the second period. The model reveals the following four main results: (i) Future liquidity constraints marginally affect today's intensity of competition but rather influence tomorrow's contest. (ii) A higher contest prize in both periods surprisingly decreases aggregate second-period investment in a symmetric contest. (iii) Counterintuitively, a higher asymmetry with respect to the contest prize valuations increases the first-period investment of both contestants.(iv) The effect of a higher asymmetry on second-period investment depends on which contestant won the first-period contest. Further results are derived with respect to the existence and uniqueness of the equilibrium, competitive balance and expected total profits.

Suggested Citation

  • Martin Grossmann, 2011. "Endogenous Liquidity Constraints in a Dynamic Contest," Working Papers 0148, University of Zurich, Institute for Strategy and Business Economics (ISU).
  • Handle: RePEc:iso:wpaper:0148
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    File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/148_ISU_full.pdf
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    References listed on IDEAS

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    Cited by:

    1. Klein, Arnd Heinrich & Schmutzler, Armin, 2017. "Optimal effort incentives in dynamic tournaments," Games and Economic Behavior, Elsevier, vol. 103(C), pages 199-224.

    More about this item

    Keywords

    Dynamic contest; liquidity constraint; competitive balance;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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