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Pré-Publication, Document De Travail Année : 2023

A Game of Competition for Risk

Résumé

In this study, we present models where participants strategically select their risk levels and earn corresponding rewards, mirroring real-world competition across various sectors. Our analysis starts with a normal form game involving two players in a continuous action space, confirming the existence and uniqueness of a Nash equilibrium and providing an analytical solution. We then extend this analysis to multi-player scenarios, introducing a new numerical algorithm for its calculation. A key novelty of our work lies in using regret minimization algorithms to solve continuous games through discretization. This groundbreaking approach enables us to incorporate additional real-world factors like market frictions and risk correlations among firms. We also experimentally validate that the Nash equilibrium in our model also serves as a correlated equilibrium. Our findings illuminate how market frictions and risk correlations affect strategic risk-taking. We also explore how policy measures can impact risk-taking and its associated rewards, with our model providing broader applicability than the Diamond-Dybvig framework. We make our methodology and code open-source 1. Finally, we contribute methodologically by advocating the use of algorithms in economics, shifting focus from finite games to games with continuous action sets. Our study provides a solid framework for analyzing strategic interactions in continuous action games, emphasizing the importance of market frictions, risk correlations, and policy measures in strategic risk-taking dynamics.
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Dates et versions

hal-04112160 , version 1 (31-05-2023)

Identifiants

  • HAL Id : hal-04112160 , version 1

Citer

Louis Abraham. A Game of Competition for Risk. 2023. ⟨hal-04112160⟩
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