The power of money: Wealth effects in contests

Abstract

The relationship between wealth and power has long been debated. Nevertheless, this relationship has been rarely studied in a strategic game. In this paper, we study wealth e¤ects in a strategic contest game. We consider three types of contests which vary depending on whether rents and e¤orts are commensurable with wealth. Our theoretical analysis reveals that the e¤ects of wealth are strongly "contestdependent", and often depend on the sign of higher-order derivatives of the utility functions. It thus does not support general claims that the rich always lobby more or that low economic growth and wealth inequality spur con ‡icts.Keywords: Con ‡ict, contest, rent-seeking, wealth, risk aversion, lobbying, power, redistribution.JEL codes: C72, D72.We would like to thank Christian Gollier and Ragnar Torvik along with seminar participants at the universities of Gothenburg and Oslo, the Helsinki Center of Economic Research (HECER), the Luxembourg School of Finance, the Norwegian School of Economics (NHH) and the University of Queensland for their useful comments and suggestions. AbstractThe relationship between wealth and power has long been debated. Nevertheless, this relationship has been rarely studied in a strategic game. In this paper, we study wealth e¤ects in a strategic contest game. We consider three types of contests which vary depending on whether rents and e¤orts are commensurable with wealth. Our theoretical analysis reveals that the e¤ects of wealth are strongly "contestdependent", and often depend on the sign of higher-order derivatives of the utility functions. It thus does not support general claims that the rich always lobby more or that low economic growth and wealth inequality spur con ‡icts.

Reward and punishment in a team contest

“…They find a non-monotonic relationship such that contribution increases from low to medium budget, yet decreases from medium to high budget. Similarly, Schroyen and Nicolas [ 50 ] develop a model using a concave utility function with risk aversion to study wealth effects in a contest. They describe two opposing effects: wealth reduces the marginal cost of effort, yet decreases the marginal benefit of winning the contest.…”

“…They describe two opposing effects: wealth reduces the marginal cost of effort, yet decreases the marginal benefit of winning the contest. Schroyen and Nicolas [ 50 ] show that the final result from these two effects is ambiguous. In a field study, Miguel et al [ 51 ] find evidence for raised levels of conflict in sub-Saharan Africa after a negative income shock (here: lack of rainfall), a result which is put into question by [ 52 ].…”

The effects of conflict budget on the intensity of conflict: an experimental investigation

“…Risk aversion among contestants (Konrad and Schlesinger 1997;Hartley 2003, 2012) can have heterogeneous, and often indeterminate, effects on contest behavior. Focusing on wealth effects, Schroyen and Treich (2016) implement a concave utility function incorporating risk aversion. They find that an increase in available budget can have two counteracting effects.…”

Rent-seeking incentives in share contests

“…Although major advances have been made in developing the analysis of winner-take-all contests to capture non-linear evaluation of contest outcomes by allowing for risk aversion since the contribution of Hillman and Katz (1984) 1 , the same is not true of share contests: the two are not equivalent under this extension. Where share contests have been studied in the literature the payoff functions used have either been of the linear or quasi-linear form so 1 See, for instance, Long and Vousden (1987); Skaperdas and Gan (1995); Riaz et al (1995); Konrad and Schlesinger (1997); Treich (2010); Cornes and Hartley (2012); Jindapon and Whaley (2015); Schroyen and Treich (2016); Jindapon and Yang (2017), and Konrad (2009) and Congleton and Hillman (2015) for reviews. Long and Vousden (1987) consider a model in which individuals each contest a rent that they will ultimately receive a share of, but the share is determined randomly, the process being influenced by all contestants' choices of efforts.…”