DP4249 Go For Broke or Play it Safe? Dynamic Competition with Choice of Variance
|Author(s):||Axel Anderson, Luís M B Cabral|
|Publication Date:||February 2004|
|Keyword(s):||differential games, r&d competition|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4249|
We consider a differential game in which the joint choices of the two players influences the variance, but not the mean, of the one-dimensional state variable. We interpret this state variable as a summary of how far ?ahead? player 1 is in the game. At each moment in time, players receive a flow pay-off which is a continuous, monotonic and bounded function of the state variable. We show that a Markov Perfect Equilibrium exists and has the property that patient players chose to play it safe when sufficiently ahead and to take risks when sufficiently behind. We also provide a simple condition that implies both players choose risky strategies when neither one is too far ahead, a situation that ensures a dominant player emerges ?quickly?.