A Model of Rent-Augmenting Contest with Limited Liability

The Mechanism of rent-augmenting contest with limited liability, which is easy found in the environments of government-guaranteed R&D contests and procurements for military products, is introduced and established. The existence of the the model\´s equilibrium is analyzed and the equilibrium effort levels of the contestants with differential risk attitudes are compared. The influence of contestants\´ effort levels on the risk of their final incomes are analyzed and it is found that there exists an effect of "risk remedy" in this model, which means that the more risk averse will exert more effort to decrease the risk of his final incomes. The cause and influences of risk remedy\´ formation are discussed. Though this mechanism has the good aspect that the risk-averse contestants intend to exert more efforts than in other mechanisms, the risk transference from the individuals to the government should be cautious and carefully censored in order to balance the positive and negative the effect of "risk remedy" in the use of government-guaranteed loans when the procurements or R&D research projects of military products or infrastructures are supported