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Risk-Taking Tournaments: Theory and Experimental Evidence

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  • Nieken, Petra

    ()
    (University of Bonn)

  • Sliwka, Dirk

    ()
    (University of Cologne)

Abstract

We study risk-taking behavior in a simple two person tournament in a theoretical model as well as a laboratory experiment. First, a model is analyzed in which two agents simultaneously decide between a risky and a safe strategy and we allow for all possible degrees of correlation between the outcomes of the risky strategies. We show that risk-taking behavior crucially depends on this correlation as well as on the size of a potential lead of one of the contestants. We find that the experimental subjects acted mostly quite well in line with the derived theoretical predictions.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3400.

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Length: 31 pages
Date of creation: Mar 2008
Date of revision:
Publication status: published in: Journal of Economic Psychology, 2010, 31 (3), 254-268
Handle: RePEc:iza:izadps:dp3400

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Keywords: risk-taking; competition; tournaments; experiment;

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References

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  1. Hvide, H.K. & Kristiansen, E.G., 1999. "Risk Taking in Selection Contests," Papers 5-99, Tel Aviv.
  2. Matthias Sutter & Christina Strassmair, 2007. "Communication, cooperation and collusion in team tournaments ? An experimental study," Working Papers 2007-19, Faculty of Economics and Statistics, University of Innsbruck.
  3. 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.
  4. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  5. Green, Jerry & Stokey, Nancy, 1983. "A Comparison of Tournaments and Contracts," Scholarly Articles 3203644, Harvard University Department of Economics.
  6. Harbring, Christine & Irlenbusch, Bernd, 2003. "An experimental study on tournament design," Labour Economics, Elsevier, vol. 10(4), pages 443-464, August.
  7. Anil Gaba & Ajay Kalra, 1999. "Risk Behavior in Response to Quotas and Contests," Marketing Science, INFORMS, vol. 18(3), pages 417-434.
  8. Jeffrey Carpenter & Peter Hans Matthews & John Schirm, 2007. "TOURNAMENTS AND OFFICE POLITICS: Evidence from a real effort experiment," Middlebury College Working Paper Series 0709, Middlebury College, Department of Economics.
  9. Matthias Kräkel & Dirk Sliwka, 2001. "Risk Taking in Asymmetric Tournaments," Bonn Econ Discussion Papers bgse33_2001, University of Bonn, Germany.
  10. 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.
  11. Hvide, H.K., 1999. "Tournament Rewards and Risk Taking," Papers 32-99, Tel Aviv.
  12. Alannah Orrison & Andrew Schotter & Keith Weigelt, 2004. "Multiperson Tournaments: An Experimental Examination," Management Science, INFORMS, vol. 50(2), pages 268-279, February.
  13. 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.
  14. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  15. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February.
  16. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March.
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Cited by:
  1. Robert Shupp & Roman M. Sheremeta & David Schmidt & James Walker, 2013. "Resource Allocation Contests: Experimental Evidence," Working Papers 13-23, Chapman University, Economic Science Institute.
  2. Christos Genakos & Mario Pagliero, 2009. "Risk Taking and Performance in Multistage Tournaments: Evidence from Weightlifting Competitions," CEP Discussion Papers dp0928, Centre for Economic Performance, LSE.
  3. Eriksen, Kristoffer W. & Kvaløy, Ola, 2014. "Myopic risk-taking in tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 37-46.
  4. Dijk, Oege & Holmen, Martin & Kirchler, Michael, 2014. "Rank matters–The impact of social competition on portfolio choice," European Economic Review, Elsevier, vol. 66(C), pages 97-110.
  5. 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.
  6. Stéphane Robin & Katerina Straznicka & Marie Claire Villeval, 2012. "Bubbles and Incentives : An Experiment on Asset Markets," Working Papers 1235, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.

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