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Risk Aversion, Heterogeneity and Contests

Richard Cornes and Roger Hartley
Public Choice
Vol. 117, No. 1/2 (Oct., 2003), pp. 1-25
Published by: Springer
Stable URL: http://www.jstor.org/stable/30025886
Page Count: 25
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Risk Aversion, Heterogeneity and Contests
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Abstract

We introduce a novel method of modelling contests that avoids the complexities encountered by the 'best response function' approach. We analyse contests in which (i) there are many risk averse players, (ii) attitudes to risk may differ across individuals, and (iii) the technology that transforms rent-seeking effort into probability of winning may also differ across individuals. We establish that, if every player has a constant degree of absolute risk aversion, a unique equilibrium exists. We also establish comparative static results and examine how the level of rent dissipation is affected by the heterogeneity of attitudes towards risk and the precise nature of the technology.

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