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A Model of a General Parimutuel System: Characterizations and Equilibrium Selection.



We formulate a model of a parimutuel system which considers a horse race with two horses. In our model, the raceholder offers a rate of his total betting revenue in the first stage. In the second stage each bettor simultaneously decides whether he bets one unit of money on one horse or he withdraws, according to his win predictions for each horse. We assume that all bettor's predictions are different and are common knowledge. We define some types of equilibria in the second stage game and give necessary and sufficient conditions for their existence. One equilibrium is a selected as a solution for the second stage game. We also define a solution for the whole game by using this result. Finally, we analyze the relation between the solution and variance for the bettor predictions.

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