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Endogenous Liquidity Constraints in a Dynamic Contest

Martin Grossmann

No 148, Working Papers from University of Zurich, Institute for Strategy and Business Economics (ISU)

Abstract: In this article, I analyze the effects of future liquidity constraints on the investment behavior of two contestants with asymmetric prize valuations in a dynamic contest model. Contestants compete in two consecutive Tullock contests in order to win a contest prize in each period. The loser of the first-period contest can be liquidity constraint in the second period. The model reveals the following four main results: (i) Future liquidity constraints marginally affect today's intensity of competition but rather influence tomorrow's contest. (ii) A higher contest prize in both periods surprisingly decreases aggregate second-period investment in a symmetric contest. (iii) Counterintuitively, a higher asymmetry with respect to the contest prize valuations increases the first-period investment of both contestants.(iv) The effect of a higher asymmetry on second-period investment depends on which contestant won the first-period contest. Further results are derived with respect to the existence and uniqueness of the equilibrium, competitive balance and expected total profits.

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)
New Economics Papers: this item is included in nep-bec and nep-mst
Date: 2011-10
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