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Liquidity constraints and the formation of unbalanced contests

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  • Grossmann, Martin
  • Hottiger, Dieter

Abstract

We analyze the effects of future liquidity constraints on contestants’ investment in a dynamic contest model. Contestants invest in two consecutive contests to win a prize in each period. The loser of the first-period contest can be liquidity-constrained in the second period due to too little remaining wealth. The winner of the first contest can reinvest the prize in the second contest. We show that future liquidity constraints mainly affect the imbalance of the contest in the future but not today. Surprisingly, larger contest prizes decrease contestants’ future investments and amplify the imbalance of future contests. However, the contest organizer can reduce this imbalance by increasing the share of the prize money in the second contest.

Suggested Citation

  • Grossmann, Martin & Hottiger, Dieter, 2020. "Liquidity constraints and the formation of unbalanced contests," International Journal of Industrial Organization, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:indorg:v:73:y:2020:i:c:s0167718720300813
    DOI: 10.1016/j.ijindorg.2020.102658
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic contest; Liquidity constraint; Competitive balance;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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