Gambling in Contests

Seel, Christian and Strack, Philipp (March 2012): Gambling in Contests. SFB/TR 15 Discussion Paper No. 375

Abstract

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. Contrary to 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 the unique Nash equilibrium outcome of the game. In equilibrium, the trade-off between risk and reward causes a non-monotonicity: highest expected losses occur if the process decreases only slightly in expectation.

• Item Type: Paper
• Keywords: Discontinuous games; Contests; Relative performance pay; Risktaking behavior
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A8 - Strategische Erzeugung und Weitergabe von Informationen
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: C72, C73, D81
• Language: English