Investment under Uncertainty in Dynamic Conflicts

Mattias K. Polborn, University of Illinois, Urbana-Champaign

Abstract

This paper analyzes 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 analyze 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.