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Risk Taking In Contests And The Role Of Carrots And Sticks

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  • SCOTT M GILPATRIC

Abstract

We study contests in which contestants choose both work effort and the variance of output (risk). Winner‐take‐all contests generate incentives for contestants to engage in costly risk taking, which is inefficient if the contest organizer values the aggregate output of all contestants. The addition of a penalty for ranking last (retaining a prize for ranking first) enables the organizer to independently control contestants’ incentives to exert productive effort and to increase output variance. In this way, the organizer can eliminate risk‐seeking behavior in settings where it is wasteful, but also control risk seeking when it is desirable, such as in research tournaments. (JEL J33, C72)

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  • Scott M Gilpatric, 2009. "Risk Taking In Contests And The Role Of Carrots And Sticks," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 266-277, April.
  • Handle: RePEc:bla:ecinqu:v:47:y:2009:i:2:p:266-277
    DOI: 10.1111/j.1465-7295.2008.00155.x
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    3. Debapriya Jojo Paul & Julia Henker & Sian Owen, 2019. "The aggregate impacts of tournament incentives in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 22(2), pages 441-476, June.
    4. Schoenberg, Eric J. & Haruvy, Ernan, 2012. "Relative performance information in asset markets: An experimental approach," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1143-1155.
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    6. Sajid Ullah & Farman Ullah Khan & Laura-Mariana Cismaș & Muhammad Usman & Andra Miculescu, 2022. "Do Tournament Incentives Matter for CEOs to Be Environmentally Responsible? Evidence from Chinese Listed Companies," IJERPH, MDPI, vol. 19(1), pages 1-20, January.
    7. Andersson, Ola & Holm, Håkan J. & Wengström, Erik, 2016. "Grind or Gamble? An Experimental Analysis of Effort and Spread Seeking in Contests," Working Papers 2016:37, Lund University, Department of Economics, revised 28 Jan 2019.
    8. Thomas, Jonathan P. & Wang, Zhewei, 2013. "Optimal punishment in contests with endogenous entry," Journal of Economic Behavior & Organization, Elsevier, vol. 91(C), pages 34-50.
    9. Chowdhury, Hasibul & Rahman, Shofiqur, 2023. "Do tournament incentives affect corporate dividend policy?," Journal of Banking & Finance, Elsevier, vol. 152(C).
    10. Spencer Bastani & Thomas Giebe & Oliver Gürtler, 2019. "A General Framework for Studying Contests," CESifo Working Paper Series 7993, CESifo.
    11. March, Christoph & Sahm, Marco, 2018. "Contests as selection mechanisms: The impact of risk aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 114-131.
    12. Lorenzo Spadoni & Jan Potters, 2018. "The Effect of Competition on Risk Taking in Contests," Games, MDPI, vol. 9(3), pages 1-18, September.
    13. Hoa Luong & Abeyratna Gunasekarage & Syed Shams, 2021. "CEO pay slice and acquisitions in Australia: the role of tournament incentives," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 18(5), pages 833-868, September.
    14. Tu Nguyen & Jing Zhao, 2021. "Industry tournament incentives and corporate innovation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 1797-1845, October.
    15. Mark Whitmeyer, 2021. "Submission Fees in Risk-Taking Contests," Papers 2108.13506, arXiv.org.
    16. Cui, Xuegang & Feltovich, Nick & Zhang, Kun, 2022. "Incentive schemes, framing, and market behaviour: Evidence from an asset-market experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 301-324.
    17. Martin Grossmann, 2021. "Asymmetric Opportunities After an Unsuccessful Sports Career," Journal of Sports Economics, , vol. 22(5), pages 587-612, June.
    18. Oliver Gürtler & Lennart Struth & Max Thon, 2022. "Competition and Risk-Taking," ECONtribute Discussion Papers Series 181, University of Bonn and University of Cologne, Germany.
    19. Bastani, Spencer & Giebe, Thomas & Gürtler, Oliver, 2022. "Simple equilibria in general contests," Games and Economic Behavior, Elsevier, vol. 134(C), pages 264-280.
    20. Nguyen, Nam H. & Phan, Hieu V. & Phan, Hung V. & Tran, Dung T.T. & Vo, Hong, 2020. "Tournament-based incentives and mergers and acquisitions," International Review of Financial Analysis, Elsevier, vol. 71(C).
    21. Gürtler, Oliver & Struth, Lennart & Thon, Max, 2023. "Competition and risk-taking," European Economic Review, Elsevier, vol. 160(C).

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    More about this item

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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