2023/05/12 by Chang Liu, Liu, Chang
Decision Sciences · Economics, Econometrics and Finance · Social Sciences · #Decision-Making and Behavioral Economics #Experimental Behavioral Economics Studies #FOS: Economics and business #Law, Economics, and Judicial Systems #Theoretical Economics (econ.TH)
paper · pdf · doi:10.48550/arxiv.2305.07218
openalex publication_date 2023/05/12 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
This paper studies the equilibrium behavior in contests with stochastic progress. Participants have access to a safe action that makes progress deterministically, but they can also take risky moves that stochastically influence their progress towards the goal and thus their relative position. In the unique well-behaved Markov perfect equilibrium of this dynamic contest, the follower drops out if the leader establishes a substantial lead, but resorts to "Hail Marys" beforehand: no matter how low the return of the risky move is, the follower undertakes in an attempt to catch up. Moreover, if the risky move has a medium return (between high and low), the leader will also adopt it when the follower is close to dropping out - an interesting preemptive motive. We also examine the impact of such equilibrium behavior on the optimal prize allocation.