Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 13/2013: The Power of Money: Wealth Effects in Contests.

Fred Schroyen () and Nicolas Treich ()
Additional contact information
Fred Schroyen: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Nicolas Treich: Toulouse School of Economics, Postal: Aile J.-J. Laffont, , Université des Sciences Sociales, , 21 Allée de Brienne, , 31000 Toulouse France

Abstract: Two wealth effects typically arise in any contest: i) wealth decreases the marginal cost of effort, but also ii) decreases the marginal benefit of winning the contest. In this paper, we introduce three types of strategic contest models depending on whether the first, second, or both wealth effects play a role: namely, a privilege contest, an ability contest, and a rent-seeking contest. Our theoretical analysis reveals that the effects of wealth and wealth inequality are strongly “contestdependent” and are complex in the sense that they depend on the decisiveness of the contest and on the higher-order derivatives of the utility functions of wealth. Our analysis thus does not support general claims that the rich should lobby more or that low economic growth and wealth inequality should lead to additional conflicts.

Keywords: Conflict; contest; rent-seeking; wealth; risk aversion; lobbying; power; redistribution.

JEL-codes: C72; D72; D74; D81

45 pages, July 9, 2013

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