Asymmetric contests with liquidity constraints
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- Grossmann, M. & Dietl, H. Public Choice (2012) 150: 691. doi:10.1007/s11127-010-9724-4
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We consider two bidders with asymmetric valuations competing to win an exogenous prize. Capital markets are imperfect, such that the contestants possibly face a liquidity constraint. We show that aggregate investments are lower if at least one bidder has a liquidity constraint, even if the low-valuation bidder possibly increases his/her investments. Furthermore, the effect of the high-valuation bidder’s liquidity constraint on competitive balance is ambiguous. However, if the low-valuation bidder is constrained, greater wealth unambiguously increases competitive balance. Surprisingly, if the low-valuation bidder has a constraint, a tighter constraint can increase his/her profit.