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Contests with multiple rounds Huseyin Yildirim Heriberto Gonzalez November 2007

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Outline Introduction Motivation The Model –An extension Conclusions Future Extensions

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Introduction There is a growing strand in contest literature recognizing that contests where one player moves before the other. Dixit (1987). Strategies differ when players can precommit their efforts. The social cost associated with the rent seeking depends on which party moves first in sequential contest. Baik and Shogren (1992) and Leininger (1993) have endogenized the order of the moves in which players simultaneously decide and commit. They find that the Stackelberg play where the underdog leads is the unique equilibrium.

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Motivation These results rest on the assumption that agents can take action only once. There are many contests in which players can exert effort multiple times without pre-announcing, i.e., Presidential candidates visiting the same state multiple times; firms participating in research; and, athletes competing in multiple categories.

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Objective Extend the analysis by Dixit (1987) and capture the three main elements present in some contests: –players can exert effort in multiple period before the contest concludes; –they do so by observing their rivals recent effort in an intermediate stage; –and, the probability of winning depends on the cumulative effort levels

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The Model Two agents i=1,2 expend irreversible effort in two periods, t=1,2 and once these become common knowledge, they simultaneously choose whether to add to the previous amount in period 2 or not. Let ; and assume the logit form p i (X 1,X 2 )= where

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The Model Thus, agent is expected payoff at the end of period 2 is given by Both symmetric and asymmetric players are considered Player 1 is the favorite and 2 the underdog by assuming that

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The Model Some facts about one-shot reaction function –Fact 1. Given X j, i (.) is strictly concave in X i –Fact 2. R i (X j ) strictly increases if the pair (X i,X j ) is such that f i (X i )>f j (X j ), reaches its maximum if f i (X i )=f j (X j ), and strictly decreases if f i (X i )

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The Model The typical case,

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The Model When there is an asymmetry between agents, given the opportunity to move first, the favorite overcommits to his effort compared to the Cournot-Nash equilibrium while the opposite holds for the underdog. Recalling,

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The Model When agents can exert effort in both periods, in order to find effort levels in a SPE, agent i solves the following program, conditional on the first period choices and conjecturing js second period amount, or equivalently, The solution is

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The continuation equilibrium occurs at the intersection of these truncated reaction function, thus second period equilibrium strategies: If a player finds himself above his reaction function, then he will exert no further effort. Otherwise, it is best for the agent to add to his first period amount up to his reaction function. The Model

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Based on these strategies, the equilibrium outcomes: Refer to Fig.1 When contestants are unevenly matched, the equilibrium outcomes entail an element of leadership by the favorite in the sense of being on the underdogs reaction function. The finding by Biak and Shoegren (1992) and Leininger (1993) no longer holds.

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The Model In settings where contestants can exert effort multiple times, the outcome with the underdogs leadership can never be an equilibrium. When the contestants are evenly matched, the unique outcome coincides with that of a one-shot Cournot-Nash play. No contestant is able to gain a strategic advantage by taking early action, even though the action is irreversible. The observation that the flexibility of multiple actions makes the favorite more aggressive is consistent with the predictions of other racing models. In particular, Harris and Vickers (1987).

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An Extension In some cases, players might have discretion over whether or not to release such information to the rival. A period 0 is introduced in which each player simultaneously decides and commits to whether to release (R) or not release (NR) the information about his first period effort to the rival. There are four subgames in period 0: (R,R), (R,NR), (NR,R) and (NR,NR). Weakly dominated strategies are eliminated.

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An Extension The result from this new setting, This is significant in two respects: –It identifies cases where even without an institutional disclosure requirement, players will voluntarily supply information regarding their early actions. –It implies that although the ability to release information typically benefits the favorite, it hurts the underdog.

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An Extension If agents choose (R,R) continuation subgame coincides with the setting analyzed if agents choose (NR,NR), then given X j, the best for agent i is to choose (x 1 i,x 2 i ) such that he ends up on his reaction function. Since this is true for both agents, the unique equilibrium outcome is (X N 1,X N 2 ) If (R f,NR u ), since the favorites first period effort is observed by both, his second period reaction function is X 1 =max{x 1 1,R 1 (X 2 )} whereas the underdog has X 2 =R 2 (X 1 ), it is best for the favorite to choose his Stackelberg leader effort in the first period and engender the outcome S fav. If (R u,NR f ) the continuation equilibrium is the solution to X 2 =max{x 1 2,R 2 (X 1 )} and X 1 = R 1 (X 2 ). Unlike the favorite, the underdog is strictly below his reaction function and therefore has an incentive to increase his effort along with the favorite in the second period. Hence, the unique equilibrium outcome in this case is (X N 1,X N 2 ).

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Conclusions The Stackelberg outcome in which the underdog leads can never be an equilibrium. The Cournot-Nash outcome is the only equilibrium outcome in which both agents might exert effort multiple times, but all yield the same outcome. In the Stackelberg outcome, the underdog can allocate the follower amount between the periods. When players have the flexibility of exerting effort multiple times the favorite act more aggressively. The favorite is more likely to win when the contest consists of multiple rounds.

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Future Extensions The possibility of partial disclosure of first period efforts has not been considered. There is no discounting. The author expects discounting to strengthen the result that the favorite leads by taking early action and the underdog follows, when multiple actions are feasible. The author conjectures that extending the model to more than two periods would not change the outcomes. This is because all the outcomes are sustained as equilibria at which all actions are taken only in the first period.

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