Risk aversion in two-period rent-seeking games

Mario Menegatti

Public Choice, 2021, vol. 188, issue 1, No 12, 269-287

Abstract: Abstract This work analyzes a two-period rent-seeking game, with the aim of studying the effect of risk aversion on the optimal choices made by the rent-seekers. We first prove that the equilibrium in two-period rent-seeking games always is unique. The analysis also shows that more risk aversion reduces the investment in the rent-seeking game in a two-period framework without introducing the additional condition of prudence, required in one-period models. Similarly, the introduction of a risky rent, instead of a given rent, implies, in the two-period framework, a reduction in investment under the condition that the rent-seekers are risk averse. Moreover, with risk aversion, larger first-period wealth increases investment in the rent-seeking game and larger second-period wealth reduces it. When both first-period and second-period wealth increase, investment in the rent-seeking game declines if the rent-seeker is risk averse and imprudent. Lastly, when a risky level of second-period wealth is introduced, the rent-seeker increases (reduces) investment in the rent-seeking game if he is risk averse and prudent (imprudent).

Keywords: Rent-seeking games; Two-period framework; Risk aversion; Risky rent; Changes in wealth (search for similar items in EconPapers)
JEL-codes: C72 D72 D81 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11127-020-00828-z

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