Go for Broke or Play it Safe? Dynamic Competition with Choice of Variance

25 Pages Posted: 5 Mar 2004

See all articles by Axel Anderson

Axel Anderson

Georgetown University - Department of Economics

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: February 2004

Abstract

We consider a differential game in which the joint choices of the two players influences the variance, but not the mean, of the one-dimensional state variable. We interpret this state variable as a summary of how far 'ahead' player 1 is in the game. At each moment in time, players receive a flow pay-off, which is a continuous, monotonic and bounded function of the state variable. We show that a Markov Perfect Equilibrium exists and has the property that patient players chose to play it safe when sufficiently ahead and to take risks when sufficiently behind. We also provide a simple condition that implies both players choose risky strategies when neither one is too far ahead, a situation that ensures a dominant player emerges 'quickly'.

Keywords: R&D competition, differential games

JEL Classification: C70, L10

Suggested Citation

Anderson, Axel and Cabral, Luis M. B., Go for Broke or Play it Safe? Dynamic Competition with Choice of Variance (February 2004). Available at SSRN: https://ssrn.com/abstract=511123

Axel Anderson

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

Luis M. B. Cabral (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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