Liquidity constraints and the formation of unbalanced contests

Martin Grossmann and Dieter Hottiger

International Journal of Industrial Organization, 2020, vol. 73, issue C

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.

Keywords: Dynamic contest; Liquidity constraint; Competitive balance (search for similar items in EconPapers)
JEL-codes: C72 C73 D43 D72 L13 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:73:y:2020:i:c:s0167718720300813

DOI: 10.1016/j.ijindorg.2020.102658

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