Gambling in contests

C. Seel*, P. Strack

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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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. Unlike 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 a Nash equilibrium outcome. In equilibrium, highest expected losses occur at an intermediate negative value of the drift.
Original languageEnglish
Pages (from-to)2033-2048
JournalJournal of Economic Theory
Volume148
Issue number5
DOIs
Publication statusPublished - 1 Jan 2013

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