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    München: Sonderforschungsbereich/Transregio 15 Governance and the Efficiency of Economic Systems
    Publication Date: 2014-03-22
    Description: 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.
    Keywords: C72 ; C73 ; D81 ; ddc:330 ; Discontinuous games ; Contests ; Relative performance pay ; Risktaking behavior ; Entscheidung bei Risiko ; Glücksspiel ; Nichtkooperatives Spiel ; Test
    Language: English
    Type: doc-type:workingPaper
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