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Risk Taking in Winner-Take-All Competition

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Author Info
Matthias Kräkel () (University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany, tel: +49 228 733914, fax: +49 228 739210, e-mail: m.kraekel@uni-bonn.de)
Petra Nieken () (University of Cologne, Herbert-Lewin-Str. 2, D-50931 Köln, Germany, tel: +49 221 4706310, fax: +49 221 4705078, e-mail: petra.nieken@uni-koeln.de)
Judith Przemeck () (University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany, tel: +49 228 739213, fax: +49 228 739210, e-mail: judith.przemeck@uni-bonn.de)

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Abstract

We analyze a two-stage game between two heterogeneous players. At stage one, common risk is chosen by one of the players. At stage two, both players observe the given level of risk and simultaneously invest in a winner-take-all competition. The game is solved theoretically and then tested by using laboratory experiments. We find three effects that determine risk taking at stage one - an effort effect, a likelihood effect and a reversed likelihood effect. For the likelihood effect, risk taking and investments are clearly in line with theory. Pairwise comparison shows that the effort effect seems to be more relevant than the reversed likelihood effect when taking risk.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 233.

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Date of creation: Mar 2008
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Handle: RePEc:trf:wpaper:233

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Related research
Keywords: Tournaments; Competition; Risk-Taking; Experiment;

Other versions of this item:

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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References listed on IDEAS
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    Other versions:
  5. Christine Harbring & Bernd Irlenbusch & Matthias Kräkel & Reinhard Selten, 2007. "Sabotage in Corporate Contests - An Experimental Analysis," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 14(3), pages 367-392. [Downloadable!] (restricted)
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