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Risk-Taking Tournaments: Theory and Experimental Evidence

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Author Info
Nieken, Petra () (University of Cologne)
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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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
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Handle: RePEc:iza:izadps:dp3400

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Keywords: tournaments competition risk-taking experiment

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Find related papers by JEL classification:
M51 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Firm Employment Decisions; Promotions
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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  1. 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. [Downloadable!] (restricted)
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  2. Edward P. Lazear & Sherwin Rosen, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Harbring, Christine & Irlenbusch, Bernd, 2003. "An experimental study on tournament design," Labour Economics, Elsevier, vol. 10(4), pages 443-464, August. [Downloadable!] (restricted)
  4. Hvide, Hans K. & Kristiansen, Eirik G., 2003. "Risk taking in selection contests," Games and Economic Behavior, Elsevier, vol. 42(1), pages 172-179, January. [Downloadable!] (restricted)
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  5. Matthias Kräkel & Dirk Sliwka, 2004. "Risk Taking in Asymmetric Tournaments," German Economic Review, Blackwell Publishing, vol. 5(1), pages 103-116, 02. [Downloadable!] (restricted)
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  6. Hans K. Hvide, 2002. "Tournament Rewards and Risk Taking," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 877-898, October. [Downloadable!]
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  7. 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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  8. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-64, June. [Downloadable!] (restricted)
  9. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March. [Downloadable!] (restricted)
  10. 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)
  11. Jeffrey Carpenter & Peter Hans Matthews & John Schirm, 2007. "Tournaments and Office Politics: Evidence from a Real Effort Experiment," IZA Discussion Papers 2972, Institute for the Study of Labor (IZA). [Downloadable!]
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