Cooperation by Credible Threats: On the Social Costs of Transfer Contests Under Uncertainty
A transfer-seeking contest for the well-known Dollar-Auction as a limit case is modeled in an infinite horizon noncooperative setting. Some kind of mild but credible threat to retaliate is shown to constitute a Markov-stationary subgame perfect equilibrium. Introducing an entry barrier to, and uncertainty about, the transfer issue at stake, this contest is shown to perform efficiently in the sense that both contenders bid δ,the entry fee, in equilibrium. This is in stark contrast to the common scenario of fully-dissipating rent-seeking frequently presented in economic theories of politics, and can be interpreted as a resolution of the well-known Tullock paradox. (JEL: D 72, C 73, D 74, L 51)
KeywordsNash Equilibrium Subgame Perfect Equilibrium Infinite Horizon Extensive Form Game Credible Threat
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