Nicolas Treich | Toulouse School of Economics

Two wealth effects typically arise in any contest:

  1. wealth decreases the marginal cost of effort, but also
  2. decreases the marginal benefit of winning the contest.

In this paper, we introduce three types of strategic contest models depending on whether the first, second, or both wealth effects play a role: namely, a privilege contest, an ability contest, and a rent-seeking contest. Our theoretical analysis reveals that the effects of wealth and wealth inequality are strongly "contest dependent" and are complex in the sense that they depend on the decisiveness of the contest and on the higher-order derivatives of the utility functions of wealth.

Our analysis thus does not support general claims that the rich should lobby more or that low economic growth and wealth inequality should lead to additional conflicts.

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