Analysis shows how investment decisions impact expected effort in stochastic contests, suggesting strategic importance for players.
Competition among rivals is often modeled as a contest in which the probability of winning is increasing in own effort. We consider incentives for players to attempt to influence their winning chances by undertaking a pre-contest investment. Investment costs are private information, and the outcome is stochastic. We characterize equilibrium by a threshold of the cost parameter that determines investment, and delineate cases where all players invest and when only some do. We consider how the attractiveness of the investment prospect impacts the investment decision and expected contest effort. In particular, the probability of investment success has an interesting non-monotonic effect on investment behavior.
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Clark et al. (2025) studied this question.
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