Eternal Peace in the Tug-of-War?

27 Pages Posted: 20 Oct 2016 Last revised: 24 Nov 2016

See all articles by Samuel Häfner

Samuel Häfner

University of St. Gallen

Kai A. Konrad

Max Planck Institute for Tax Law and Public Finance; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); IZA Institute of Labor Economics

Date Written: October 18, 2016

Abstract

The tug-of-war between single players is known to have a non-cooperative Markov-perfect equilibrium in which both players expend zero efforts and neither player drives the Markov process to one of the terminal states. We show that these peaceful outcomes vanish if the single players are replaced by teams with team members permanently assigned to the different Markov states and interacting pairwise in an all-pay auction. The reason for this phenomenon is that the members of the teams can externalize future effort costs while the single players cannot. Our analysis also highlights the impact of the discount factor on the expected trajectory of the tug-of-war, the dynamics of the expected efforts, and the degree of rent dissipation.

Keywords: Contests, Teams, Tug-of-War

JEL Classification: D 74, D72

Suggested Citation

Häfner, Samuel and Konrad, Kai A., Eternal Peace in the Tug-of-War? (October 18, 2016). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2016-09. Available at SSRN: https://ssrn.com/abstract=2854810 or http://dx.doi.org/10.2139/ssrn.2854810

Samuel Häfner (Contact Author)

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Kai A. Konrad

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

HOME PAGE: http://www.tax.mpg.de/en/pub/home.cfm

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, 81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, 53072
Germany

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