Risk attitudes and heterogeneity in simultaneous and sequential contests (with Zhe Yang, University of Alabama)

Paan Jindapon | University of Alabama

We analyze a class of rent-seeking contests in which players are heterogeneous in both risk preferences and production technology. We find that there exists a unique Nash equilibrium whenever each player’s absolute measure of risk aversion is constant and marginal productivity is non-increasing in rent-seeking investment. If the number of risk-loving players is large enough, the aggregate investment in equilibrium will exceed the rent and all risk-neutral and risk-averse players will exit the contest. In a standard Tullock contest with two players and homogeneous technology, the player who is less downside-risk-averse is the favorite to win the rent. In a sequential contest, if the first mover is less (more) downside-risk-averse and the second mover is risk-averse (risk-loving), the first mover will be the favorite (underdog) in the contest.