Dynamic Contests with Bankruptcy: The Despair Effect

33 Pages Posted: 1 Apr 2014 Last revised: 11 Apr 2014

See all articles by Luis C. Corchón

Luis C. Corchón

Universidad Carlos III de Madrid - Department of Economics

Carmen Bevia

Universidad de Alicante

Date Written: April 10, 2014

Abstract

We analyze a two period contest in which agents may become bankrupt at the end of the …first period. A bankrupt agent is excluded from the contest in the second period of the game. We investigate the existence of a subgame perfect equilibrium in pure strategies. We distinguish between a borrowing equilibrum where at least an agent might be bankrupt and a non borrowing equilibrium where no agent is bankrupted. We prove that the former occurs when the agent taking loans is relatively poor. This is the despair effect where severely handicapped agents take actions that are risky. We also show conditions under which both kind of equilibria overlap or not. We provide an example in which no equilibrium exists.

Suggested Citation

Corchón Diaz, Luis Carlos and Bevia, Carmen, Dynamic Contests with Bankruptcy: The Despair Effect (April 10, 2014). Available at SSRN: https://ssrn.com/abstract=2418876 or http://dx.doi.org/10.2139/ssrn.2418876

Luis Carlos Corchón Diaz (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Carmen Bevia

Universidad de Alicante ( email )

Campus de San Vicente, sn
Alicante, 03690
Spain

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