Endogenous Incumbency in Repeated Contests

Fabian Dietz and Stephan Eitel

No 243, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: We consider a model of infinitely repeated lottery contests in which the winner of the prior contest (incumbent) additionally gains the opportunity to bias the subsequent contest by exerting early effort in an intermediate stage. An effortmaximizing contest designer strategically chooses the cost advantage of incumbency. We show that the contest designer prefers to set the cost advantage such that the incumbent only partially discourages the contender, i.e. the contender exerts less, but still positive, effort than in an unbiased contest. In this way, rent extraction is higher than under independent lottery contests with no intermediate stage, because (i) players compete fiercer to become the incumbent and (ii) the increase in early effort outweighs the decrease in effort in the biased contest. Therefore, we provide some rationale for incumbency advantages, for example in repeated procurement settings.

Keywords: repeated contests; lottery contest; incumbent; discouragement effect (search for similar items in EconPapers)
JEL-codes: C72 C73 D72 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2025-10
New Economics Papers: this item is included in nep-mic and nep-spo
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