Advanced Search
MyIDEAS: Login

Optimal risk taking in an uneven tournament game with risk averse players

Contents:

Author Info

  • Kräkel, Matthias

Abstract

We analyze the optimal choice of risk in a two-stage tournament game between two players that have different concave utility functions. At the first stage, both players simultaneously choose risk. At the second stage, both observe overall risk and simultaneously decide on effort or investment. The results show that those two effects which mainly determine risk taking - an effort effect and a likelihood effect - are strictly interrelated. This finding sharply contrasts with existing results on risk taking in tournament games with symmetric equilibrium efforts where such linkage can never arise. Conditions are derived under which this linkage leads to a reversed likelihood effect so that the favorite (underdog) can increase his winning probability by increasing (decreasing) risk which is impossible in a completely symmetric setting.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6VBY-4S01WRS-1/2/410f7d5a60d20ead4da2b944292b00f0
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 44 (2008)
Issue (Month): 11 (December)
Pages: 1219-1231

as in new window
Handle: RePEc:eee:mateco:v:44:y:2008:i:11:p:1219-1231

Contact details of provider:
Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: Asymmetric equilibria Rank-order tournaments Risk taking;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Hvide, Hans K. & Kristiansen, Eirik G., 2003. "Risk taking in selection contests," Games and Economic Behavior, Elsevier, vol. 42(1), pages 172-179, January.
  2. Anja Schöttner, 2005. "Fixed-Prize Tournaments versus First-Price Auctions in Innovation Contests," SFB 649 Discussion Papers SFB649DP2005-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Schmalensee, Richard, 1976. "A Model of Promotional Competition in Oligopoly," Review of Economic Studies, Wiley Blackwell, vol. 43(3), pages 493-507, October.
  4. Steven Tadelis, 2002. "The Market for Reputations as an Incentive Mechanism," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 854-882, August.
  5. Kong-Pin Chen, 2003. "Sabotage in Promotion Tournaments," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 119-140, April.
  6. Dragon, Robert & Garvey, Gerald T. & Turnbull, Geoffrey K., 1996. "A collective tournament," Economics Letters, Elsevier, vol. 50(2), pages 223-227, February.
  7. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  8. O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
  9. Warneryd, Karl, 2000. "In Defense of Lawyers: Moral Hazard as an Aid to Cooperation," Games and Economic Behavior, Elsevier, vol. 33(1), pages 145-158, October.
  10. 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.
  11. Hans K. Hvide, 2000. "Tournament Rewards and Risk Taking," Econometric Society World Congress 2000 Contributed Papers 0163, Econometric Society.
  12. J. Atsu Amegashie, 2007. "American Idol: Should it be a Singing Contest or a Popularity Contest?," CESifo Working Paper Series 2171, CESifo Group Munich.
  13. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March.
  14. repec:ebl:ecbull:v:28:y:2007:i:16:p:a0 is not listed on IDEAS
  15. Stefan Szymanski, 2003. "The Economic Design of Sporting Contests," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1137-1187, December.
  16. Robert Gibbons & Kevin J. Murphy, 1991. "Relative Performance Evaluation for Chief Executive Officers," NBER Working Papers 2944, National Bureau of Economic Research, Inc.
  17. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December.
  18. Muller, Sigrid M. & Machina, Mark J., 1987. "Moment preferences and polynomial utility," Economics Letters, Elsevier, vol. 23(4), pages 349-353.
  19. Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
  20. 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.
  21. Christian Grund & Oliver Gurtler, 2005. "An empirical study on risk-taking in tournaments," Applied Economics Letters, Taylor & Francis Journals, vol. 12(8), pages 457-461.
  22. Matthias Kräkel & Dirk Sliwka, 2004. "Risk Taking in Asymmetric Tournaments," German Economic Review, Verein für Socialpolitik, vol. 5(1), pages 103-116, 02.
  23. Anil Gaba & Ajay Kalra, 1999. "Risk Behavior in Response to Quotas and Contests," Marketing Science, INFORMS, vol. 18(3), pages 417-434.
  24. Konrad, Kai A., 2007. "Strategy in contests: an introduction," Discussion Papers, Research Unit: Market Processes and Governance SP II 2007-01, Social Science Research Center Berlin (WZB).
  25. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
  26. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Toru Suzuki, 2010. "Competitive Problem Solving and the Optimal Prize Schemes," Jena Economic Research Papers 2010-083, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  2. J. Atsu Amegashie, 2007. "American Idol: Should it be a Singing Contest or a Popularity Contest?," CESifo Working Paper Series 2171, CESifo Group Munich.
  3. 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.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:44:y:2008:i:11:p:1219-1231. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.