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 language | English |
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Pages (from-to) | 2033-2048 |
Journal | Journal of Economic Theory |
Volume | 148 |
Issue number | 5 |
DOIs | |
Publication status | Published - 1 Jan 2013 |