Download this Paper Open PDF in Browser

Gambling in Dynamic Contests

24 Pages Posted: 11 Sep 2009 Last revised: 18 Dec 2014

Christian Seel

Maastricht University

Philipp Strack

University of California, Berkeley - Department of Economics

Date Written: September 11, 2009

Abstract

This paper presents a strategic model of risk-taking behavior in the framework of a continuous time contest. Formally, we analyze a dynamic game in which each player decides when to stop a privately observed Brownian Motion with drift. Only the player who stops his process at the highest value wins a prize. We derive a closed-form solution for the unique Nash equilibrium outcome in mixed strategies and we establish that the expected value of the stopped stochastic processes is non-monotone in the drift. In particular, the highest losses in terms of expected value occur if the drift is only moderately negative. Thus, relative performance payments, while suitable to provide the right incentives in good times, induce socially undesirable gambling activities if times are moderately bad. Possible applications of the model include contests for status, job promotion contests, competition between mutual funds, and relative payment schemes of CEOs.

Keywords: discontinuous games, dynamic contests, relative performance pay, risk-taking behavior

JEL Classification: C72, C73, D81

Suggested Citation

Seel, Christian and Strack, Philipp, Gambling in Dynamic Contests (September 11, 2009). Available at SSRN: https://ssrn.com/abstract=1472078 or http://dx.doi.org/10.2139/ssrn.1472078

Christian Seel (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands
0031 433883651 (Phone)

Philipp Strack

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://philippstrack.com

Paper statistics

Downloads
448
Rank
52,251
Abstract Views
1,936