
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 |
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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 |
URN: | urn:nbn:de:bvb:19-epub-13179-7 |
Language: | English |
Item ID: | 13179 |
Date Deposited: | 10. Jul 2012, 13:05 |
Last Modified: | 04. Nov 2020, 12:53 |