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Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?

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  • Michael Schwarz
  • Sergei Severinov

Abstract

We study "investment tournaments," a class of decisionproblems involving gradual allocation of investment among severalalternatives whose values are subject to shocks. The decision maker'spayoff is determined by the final values of the alternatives. An important example of such tournaments is the career choice problem, since a person typically starts by investing in learning several professions.We show that in many cases it is optimal for the decision maker to allocate all resources to the most promising alternative in each time period. We also show that in promotion tournaments the workers optimally exert higher efforts at an early stage in order to capture a larger share of employer's investment, such as mentoring. (c) 2010 by The University of Chicago. All rights reserved.

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  • Michael Schwarz & Sergei Severinov, 2010. "Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?," Journal of Labor Economics, University of Chicago Press, vol. 28(4), pages 893-922, October.
    • Handle: RePEc:ucp:jlabec:v:28:y:2010:i:4:p:893-922
    DOI: 10.1086/653504
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    3. Fu, Qiang & Lu, Jingfeng & Lu, Yuanzhu, 2012. "Incentivizing R&D: Prize or subsidies?," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 67-79.

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