Dynamic Competition with No Efficiency Effect

No 512, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: I uncover a new force towards increasing dominance (the property whereby, in dynamic games, the leader tends to increase her lead in expected terms). The new effect results from the strategic choice of covariance in races. I assume that players must choose not the amount of resources to spend but how to allocate those resources. I show that the laggard has an incentive to chose a different path from the leader. In equilibrium, this results in the laggard choosing a less promising path, in effect trading off lower expected value for lower correlation with respect to the leader. This in turn leads to increasing dominance. In order to make the point as clear as possible and differentiate it from the forces previously characterized, I assume that no joint payoff (or efficiency) effect is present.

Date: 2000-08-01
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