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Endogenous Liquidity Constraints in a Dynamic Contest

  • Martin Grossmann

    ()

    (Department of Business Administration, University of Zurich)

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.

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File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/148_ISU_full.pdf
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Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0148.

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Length: 36 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:iso:wpaper:0148
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  1. Amegashie, J Atsu, 1999. " The Design of Rent-Seeking Competitions: Committees, Preliminary and Final Contests," Public Choice, Springer, vol. 99(1-2), pages 63-76, April.
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