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Tournament Rewards and Risk Taking

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Author Info
Hans K. Hvide (Norwegian School of Economics and Business)

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Abstract

This article considers a Lazear-Rosen tournament model where agents can influence both the spread of their output distribution (risk taking) and its mean. The unique equilibrium induces excessive risk taking and a low level of effort. By modifying the tournament to give the highest prize to the agent with the "most moderate" output, a low level of risk taking and high level of effort can be sustained as an equilibrium. The first result can be useful to understand the Relative Performance Evaluation Puzzle of executive compensation, and the second result can be useful to understand puzzling workplace norms promoting mediocrity.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 20 (2002)
Issue (Month): 4 (October)
Pages: 877-898
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Handle: RePEc:ucp:jlabec:v:20:y:2002:i:4:p:877-898

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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.:
  1. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June. [Downloadable!] (restricted)
  2. Rajesh Aggarwal & Andrew A. Samwick, 1998. "The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation," NBER Working Papers 6634, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
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  4. Dekel, Eddie & Ely, Jeffrey & Yilankaya, Okan, 2004. "Evolution of Preferences," Micro Theory Working Papers dekel-04-08-13-01-21-07, Microeconomics.ca Website, revised 09 Jun 2006. [Downloadable!]
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  5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
  7. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
  8. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier. [Downloadable!] (restricted)
  9. Heinkel, Robert & Stoughton, Neal M, 1994. "The Dynamics of Portfolio Management Contracts," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(2), pages 351-87. [Downloadable!] (restricted)
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This page was last updated on 2009-11-21.

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