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Continuois Time Contests

  • Seel, Christian
  • Strack, Philipp

This paper introduces a contest model in which each player decides when to stop a privately observed Brownian motion with drift and incurs costs depending on his stopping time. The player who stops his process at the highest value wins a prize. Applications of the model include procurement contests and competitions for grants. We prove existence and uniqueness of the Nash equilibrium outcome, even if players have to choose bounded stopping times. We derive the equilibrium distribution in closed form. If the noise vanishes, the equilibrium outcome converges to - and thus selects - the symmetric equilibrium outcome of an all-pay auction. For two players and constant costs, each player’s profits increase if costs for both players increase, variance increases, or drift decreases. Intuitively, patience becomes a more important factor for contest success, which reduces informational rents.

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File URL: http://epub.ub.uni-muenchen.de/13178/1/376.pdf
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Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 376.

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Date of creation: Mar 2012
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Handle: RePEc:trf:wpaper:376
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  1. Andreas Park & Lones Smith, 2008. "Caller Number Five and Related Timing Games," Working Papers tecipa-317, University of Toronto, Department of Economics.
  2. Axel Anderson & Luís M. B. Cabral, 2007. "Go for broke or play it safe? Dynamic competition with choice of variance," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 593-609, 09.
  3. Lones Smith & Giuseppe Moscarini, 2007. "Optimal Dynamic Contests," 2007 Meeting Papers 249, Society for Economic Dynamics.
  4. Taylor, Curtis R, 1995. "Digging for Golden Carrots: An Analysis of Research Tournaments," American Economic Review, American Economic Association, vol. 85(4), pages 872-90, September.
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