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Risk Taking in Asymmetric Tournaments

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  • Matthias Kräkel
  • Dirk Sliwka

Abstract

A tournament is examined in which two agents with different abilities choose efforts as well as risks. According to the previous literature, the more (less) able agent should choose a low (high) risk strategy, because the first one does not want to imperil his favorable position, whereas the last one can only gain by increasing risk. We show that this is not necessarily true. Risk taking affects equilibrium efforts as well as winning probabilities. Depending on both effects diverse equilibria are possible. For example, the low and the high ability agent may both choose high risks or both choose low risks. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2004.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 5 (2004)
Issue (Month): 1 (02)
Pages: 103-116

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Handle: RePEc:bla:germec:v:5:y:2004:i:1:p:103-116

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  1. Robert Gibbons & Kevin J. Murphy, 1991. "Relative Performance Evaluation for Chief Executive Officers," NBER Working Papers 2944, National Bureau of Economic Research, Inc.
  2. Ronald G. Ehrenberg & Michael L. Bognanno, 1988. "Do Tournaments Have Incentive Effects?," NBER Working Papers 2638, National Bureau of Economic Research, Inc.
  3. Ronald G. Ehrenberg & Michael L. Bognanno, 1990. "The incentive effects of tournaments revisited: Evidence from the European PGA tour," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 74-88, February.
  4. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  5. Hans K. Hvide, 2002. "Tournament Rewards and Risk Taking," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 877-898, October.
  6. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
  7. Knoeber, Charles R & Thurman, Walter N, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 155-79, April.
  8. Glazer, Amihai & Hassin, Refael, 1988. "Optimal Contests," Economic Inquiry, Western Economic Association International, vol. 26(1), pages 133-43, January.
  9. Hoffler, Felix & Sliwka, Dirk, 2003. "Do new brooms sweep clean? When and why dismissing a manager increases the subordinates' performance," European Economic Review, Elsevier, vol. 47(5), pages 877-890, October.
  10. Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-80, April.
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Citations

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Cited by:
  1. Matthias Kräkel & Petra Nieken & Judith Przemeck, 2008. "Risk Taking in Winner-Take-All Competition," Bonn Econ Discussion Papers bgse7_2008, University of Bonn, Germany.
  2. Eriksen, Kristoffer W. & Kvaløy, Ola, 2014. "Myopic risk-taking in tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 37-46.
  3. Mueller-Langer, Frank & Andreoli-Versbach, Patrick, 2013. "Leading-effect vs. Risk-taking in Dynamic Tournaments: Evidence from a Real-life Randomized Experiment," Discussion Papers in Economics 15452, University of Munich, Department of Economics.
  4. Nieken, Petra & Stegh, Michael, 2010. "Incentive Effects in Asymmetric Tournaments Empirical Evidence from the German Hockey League," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 305, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Christian Grund & Oliver Gürtler, 2005. "An Empirical Study on Risk Taking in Tournaments," Bonn Econ Discussion Papers bgse6_2005, University of Bonn, Germany.
  6. Nieken, Petra & Sliwka, Dirk, 2010. "Risk-taking tournaments - Theory and experimental evidence," Journal of Economic Psychology, Elsevier, vol. 31(3), pages 254-268, June.
  7. Matthias Kräkel, 2007. "Optimal Risk Taking in an Uneven Tournament Game with Risk Averse Players," Bonn Econ Discussion Papers bgse4_2007, University of Bonn, Germany.
  8. Kräkel, Matthias & Schöttner, Anja, 2010. "Technology choice, relative performance pay, and worker heterogeneity," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 748-758, December.
  9. Konrad, Kai A., 2005. "Tournaments and Multiple Productive Inputs: The Case of Performance Enhancing Drugs," IZA Discussion Papers 1844, Institute for the Study of Labor (IZA).
  10. Eriksen, Kristoffer W. & Kvaløy, Ola & Olsen, Trond E., 2008. "Tournaments with prize-setting agents," Discussion Papers 2008/23, Department of Business and Management Science, Norwegian School of Economics.

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