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Optimal Risk Taking in an Uneven Tournament Game with Risk Averse Players

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  • Kräkel, Matthias

Abstract

We analyze the optimal choice of risk in a two-stage tournament game between two players that have different concave utility functions. At the first stage, both players simultaneously choose risk. At the second stage, both observe overall risk and simultaneously decide on effort or investment. The results show that those two effects which mainly determine risk taking — an effort effect and a likelihood effect — are strictly interrelated. This finding sharply contrasts with existing results on risk taking in tournament games with symmetric equilibrium efforts where such linkage can never arise. Hence, previous findings based on symmetry at the effort stage turn out to be nongeneric.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 200.

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Date of creation: Apr 2007
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Handle: RePEc:trf:wpaper:200

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Keywords: asymmetric equilibria; rank-order tournaments; risk taking;

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Cited by:
  1. J. Atsu Amegashie, 2009. "American Idol: should it be a singing contest or a popularity contest?," Journal of Cultural Economics, Springer, vol. 33(4), pages 265-277, November.
  2. Kräkel, Matthias & Schöttner, Anja, 2010. "Technology choice, relative performance pay, and worker heterogeneity," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 748-758, December.

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