On Rent Dissipation in Dynamic Multi-battle Contests
Shanglyu Deng, Qiang Fu, Junchi Li, Zenan Wu
TLDR
This paper studies dynamic multi-battle contests, identifying "exchangeability" as a key property influencing rent dissipation and providing conditions for almost-full dissipation.
Key contributions
- Analyzes dynamic multi-battle contests to understand how structure impacts incentives and rent dissipation.
- Identifies "exchangeability" as a structural property that causes a discouragement effect, preventing full rent dissipation.
- Establishes a necessary and sufficient condition for almost-full rent dissipation based on the exchangeability insight.
Why it matters
This research offers crucial insights into competitive dynamics, explaining why full rent dissipation often doesn't occur. It shows how environmental volatility can sustain incentives and achieve almost-full rent dissipation, providing valuable understanding for various competitive phenomena.
Original Abstract
We study dynamic multi-battle contests and examine how the contest structure shapes dynamic incentives and determines the extent of rent dissipation. A discouragement effect often arises -- such as in tug-of-war and best-of-$K$ contests -- preventing full rent dissipation even when the series can extend infinitely. We identify a structural property, exchangeability, that contributes to the effect. Leveraging this insight, we establish a necessary and sufficient condition for almost-full rent dissipation. As an application, we introduce the iterated incumbency contest, which illustrates how volatility in the surrounding environment sustains dynamic incentives and generates almost-full rent dissipation, and thus offers insights into various competitive phenomena.
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