Risk-bearing in a winner-take-all contest

A parsimonious model is used to explore the risk-bearing decision under a payoff structure that emphasizes relative performance. Equilibrium betting amounts are derived for players who start with unequal endowments and face a lottery that offers either a positive or negative expected return. If the lottery offers negative expected return, disadvantaged players are willing to risk a portion of their endowment, and this induces advantaged players to also gamble, defensively. Although there are equilibria in which the advantaged preemptively gamble more than the disadvantaged, in the robust equilibrium it is the disadvantaged who make the larger bets. If the lottery offers positive expected return, there are equilibria in which the advantaged invest less than the disadvantaged, but full investment by all players is a more robust equilibrium.contest; tournament; relative evaluation; risk

Strategic Commitment to Pursue a Goal other than Profit in a Cournot Duopoly

Competition among profit-seeking firms in an oligopolistic industry inherently generates incentives for firms to commit to maximize a performance metric other than profit.We briefly review the underlying theory,analyze its ramifications in a Cournot duopoly,and consider feasibility constraints from the perspective of strategic management

Licensing of a lower-cost production process to an asymmetric Cournot duopoly

An outside inventor of a new production process seeks to license it to Cournot duopolists which have unequal ex ante costs. Distinguishing "leading-edge" innovations (new cost below both firms' costs) from "catch-up" innovations (new cost between the two firms' costs), we compare the equilibria of two license-selling mechanisms: exclusive license auction and non-exclusive price-setting. In contrast to the often-studied case of an innovation that reduces the cost of any licensee by the same amount, we show that licensing of a new process may attenuate the ex ante cost asymmetry, allow the inefficient firm to leapfrog its competitor, and raise the licensee's net profits.cost-reducing innovation; technology licensing

How the sunk costs of incumbents make entrants important for innovation : a model and implications for policy

The paper clarifies how sunk costs can lead a rational incumbent to innovate less than an entrant. It also demonstrates that competition among incumbents yields less adoption of new and more efficient production technology than competition which includes entrants. The results suggest that policy promoting adoption of next-generation production technology should distinguish among firms based on their sunk costs in current-generation technology and encourage entry by industry outsiders such as startups or firms from other industries

Licensing of a lower-cost production process to an asymmetric Cournot duopoly

An outside inventor of a new production process seeks to license it to Cournot duopolists which have unequal ex ante costs. Distinguishing “leading-edge” innovations (new cost below both firms’ costs) from “catch-up” innovations (new cost between the two firms’ costs), we compare the equilibria of two license-selling mechanisms: exclusive license auction and non-exclusive price-setting. In contrast to the often-studied case of an innovation that reduces the cost of any licensee by the same amount, we show that licensing of a new process may attenuate the ex ante cost asymmetry, allow the inefficient firm to leapfrog its competitor, and raise the licensee’s net profits

Risk-Bearing in a Winner-Take-All Contest

A parsimonious model is used to explore the risk-bearing decision under a payoff structure that emphasizes relative performance. Equilibrium betting amounts are derived for players who start with unequal endowments and face a lottery that offers either a positive or negative expected return. If the lottery offers negative expected return, disadvantaged players are willing to risk a portion of their endowment, and this induces advantaged players to also gamble, defensively. Although there are equilibria in which the advantaged preemptively gamble more than the disadvantaged, in the robust equilibrium it is the disadvantaged who make the larger bets. If the lottery offers positive expected return, there are equilibria in which the advantaged invest less than the disadvantaged, but full investment by all players is a more robust equilibrium

Evolution of mindsight, transparency and rule-rationality

Evolution of preferences models often assume that all agents display and observe preferences costlessly. Instead, we endogenize mindsight (to observe preferences) and transparency (to show preferences) as slightly costly mechanisms that agents may or may not possess. Unlike in the costless models, we show that universal rule-rationality, mindsight and transparency do not constitute an equilibrium but universal act-rationality, mind-blindness, and opaqueness do. We also find that rule-rationality, mindsight, and transparency may exist in evolved populations, albeit only in a portion of the population whose size fluctuates along an orbit around a focal point. We apply our results to Ultimatum and Trust games to explore how costly and optional mindsight may affect economic performance in interactions among evolved agents

Evolution of vulnerability to pain in interpersonal relations as a strategic trait aiding cooperation

Why are humans so vulnerable to pain in interpersonal relations and can so easily hurt others physically and emotionally? We theoretically examine whether being offensively strong but defensively weak can evolve as a strategic trait that fosters cooperation. We study a population comprised of "thick-skinned" and "thin-skinned" agents by using an indirect evolution model that combines rational choice in strategic interactions with evolutionary selection across generations. We find that (a) the relatively vulnerable and cooperative thin-skins cannot evolve under purely random matching, (b) with some assortment thin-skins evolve and can take over the entire population, (c) vulnerability to greater pain makes it easier for thin-skins to evolve, and (d) proximate pain which merely feels bad but does not lower fitness helps thin-skins evolve even more than pain which accurately reflects fitness consequences. We draw contrast with the Hawk-Dove model and identify several ways in which rationality hinders the evolution of the relatively vulnerable and peaceful type of agent

A Study of How Pursuit of Wealth Rank Distorts Risk Preferences

We theoretically explore the risk-taking behavior of two unequally-endowed risk-neutral agents who are presented with opportunities to play lotteries. We fi nd that if the agents consider rank in the wealth distribution more important than wealth itself, then their risk preferences are distorted in a way that lowers their expected income, raises inequality and increases wealth-rank mobility. In equilibrium, the rich agent avoids some positive expected return lotteries and both agents gamble on some negative expected return lotteries. We simulate and graph equilibrium strategies to visualize how trying to get richer differs from trying to be richer than someone else

Net Buyers and Sellers of Labor : Linkage Between Monetary and Time Inequality

Consumption of products and services involves paying for other people’s labor. Since everyone is endowed with 24 hours per day but works and consumes differently, there must exist net sellers and net buyers of time. We theoretically explore the equilibrium pattern of net selling and buying of time in an economy of agents with unequal wealth endowments. After demonstrating how trade in time reduces inequality in wealth but creates inequality in time, we discuss implications and extensions