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Asymmetric contests with liquidity constraints


Dietl, Helmut; Grossmann, Martin (2012). Asymmetric contests with liquidity constraints. Public Choice, 150(3-4):691-713.

Abstract

We consider two bidders with asymmetric valuations competing to win an exogenous prize. Capital markets are imperfect, such that the contestants possibly face a liquidity constraint. We show that aggregate investments are lower if at least one bidder has a liquidity constraint, even if the low-valuation bidder possibly increases his/her investments. Furthermore, the effect of the high-valuation bidder’s liquidity constraint on competitive balance is ambiguous. However, if the low-valuation bidder is constrained, greater wealth unambiguously increases competitive balance. Surprisingly, if the low-valuation bidder has a constraint, a tighter constraint can increase his/her profit.

Abstract

We consider two bidders with asymmetric valuations competing to win an exogenous prize. Capital markets are imperfect, such that the contestants possibly face a liquidity constraint. We show that aggregate investments are lower if at least one bidder has a liquidity constraint, even if the low-valuation bidder possibly increases his/her investments. Furthermore, the effect of the high-valuation bidder’s liquidity constraint on competitive balance is ambiguous. However, if the low-valuation bidder is constrained, greater wealth unambiguously increases competitive balance. Surprisingly, if the low-valuation bidder has a constraint, a tighter constraint can increase his/her profit.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Sociology and Political Science
Social Sciences & Humanities > Economics and Econometrics
Language:English
Date:2012
Deposited On:20 Feb 2012 13:31
Last Modified:11 Mar 2020 22:29
Publisher:Springer
ISSN:0048-5829
OA Status:Green
Publisher DOI:https://doi.org/10.1007/s11127-010-9724-4
Other Identification Number:merlin-id:6316

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