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New BGPE Discussion Paper by Fabian Dietz and Stephan Eitel

 

Fabian Dietz and  Stephan Eitel published a new paper titledEndogenous Incumbency in Repeated Contestsin the BGPE Discussion Paper Series (No 244). 

Abstract

We consider a model of infinitely repeated lottery contests in which the winner of the prior contest (incumbent) additionally gains the opportunity to bias the subsequent contest by exerting early effort in an intermediate stage. An effort-maximizing contest designer strategically chooses the cost advantage of incumbency. We show that the contest designer prefers to set the cost advantage such that the incumbent only partially discourages the contender, i.e. the contender exerts less, but still positive, effort than in an unbiased contest. In this way, rent extraction is higher than under independent lottery contests with no intermediate stage, because (i) players compete fiercer to become the incumbent and (ii) the increase in early effort outweighs the decrease in effort in the biased contest. Therefore, we provide some rationale for incumbency advantages, for example in repeated procurement settings.