Tournament Rewards and Risk Taking
AbstractI consider two seemingly unrelated puzzles; 1. Why is relative performance evaluation (RPE) used less in CEo compensation than agency theory suggests? 2. Why is sometimes, e.g., for fund managers, a mediocre performance more highly rewarded than excellence? I consider a simple tournament model, where agents can influence the spread of output in addition to its mean. Ishow that standard tournament rewards induce risky and lazy behavior from the agents. This finding sheds light on Puzzle 1. Second, I consider a scheme that ranks agents according to their relative closeness to a benchmark k. I show that there exists intermediate values of k such that the risky-lazy problem of the standard tournament can be mitigated. This result sheds light on Puzzle 2.
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Bibliographic InfoPaper provided by Tel Aviv in its series Papers with number 32-99.
Length: 19 pages
Date of creation: 1999
Date of revision:
Contact details of provider:
Postal: Israel TEL-AVIV UNIVERSITY, THE FOERDER INSTITUTE FOR ECONOMIC RESEARCH, RAMAT AVIV 69 978 TEL AVIV ISRAEL.
Web page: http://econ.tau.ac.il/research/foerder.asp
More information through EDIRC
RISK ; ECONOMIC MODELS ; BEHAVIOUR;
Other versions of this item:
- Hans K. Hvide, 2000. "Tournament Rewards and Risk Taking," Econometric Society World Congress 2000 Contributed Papers 0163, Econometric Society.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
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