Journal Article

Investment under Uncertainty in Dynamic Conflicts

Mattias Polborn

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 73, issue 2, pages 505-529
Published in print April 2006 | ISSN: 0034-6527
Published online April 2006 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2006.0385.x
Investment under Uncertainty in Dynamic Conflicts

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This paper analyses a model in which two groups repeatedly compete with each other for a prize in every time period. We assume that there is a status quo bias: if there is a fight today, yesterday's winner is in a stronger position than the other group. Hence, a change of the status quo has long-term consequences that groups need to take into account. Important applications of this model include lobbying for legislation and political transitions through revolutions. We analyse the strategic timing of attacks on the status quo, which is similar to investment decisions under uncertainty. We find that the attack threshold is considerably lower than in a comparable one-period game, and that the expenditure level necessary to change the status quo is low in comparison to the prize; this provides a possible solution to Tullock's “rent-seeking paradox” in lobbying.

Keywords: D81; D82

Journal Article.  14333 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy

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