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Gambling in risk-taking contests: Experimental evidence

Author

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  • Embrey, Matthew
  • Seel, Christian
  • Philipp Reiss, J.

Abstract

This paper experimentally investigates risk taking in contest schemes by implementing a stopping task based on Seel and Strack (2013). In this stylized setting, managers with contest payoffs have an incentive to delay halting projects with a negative expectation, with the induced inefficiency being highest for a moderately negative drift. The experiment systematically varies the negative drift (between-subjects) and the payoff incentives (within-subject). We find evidence for risk taking in all our treatment conditions, with the non-monotonicity at least as pronounced as predicted. Contrary to the theoretical predictions, a similar pattern of behaviour persists even without contest incentives, suggesting contest incentives are not the only driver of risk-taking behaviour. Instead, observed behaviour violates expected utility maximization and is consistent with some intrinsic motivation for taking risk and myopic reasoning about the opponent. We explore the interplay between intrinsic incentives and the payment scheme and find that contest incentives might crowd out an intrinsic inclination to risk-taking.

Suggested Citation

  • Embrey, Matthew & Seel, Christian & Philipp Reiss, J., 2024. "Gambling in risk-taking contests: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 221(C), pages 570-585.
    • Handle: RePEc:eee:jeborg:v:221:y:2024:i:c:p:570-585
    DOI: 10.1016/j.jebo.2024.02.024
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    More about this item

    Keywords

    Contests; Relative performance pay; Risk-taking behaviour; Laboratory experiment;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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