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Winning ways: How rank-based incentives shape risk-taking decisions

Author

Listed:
  • Fang, Dawei

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Ke, Changxia

    (School of Economics and Finance, Queensland University of Technology)

  • Kubitz, Greg

    (School of Economics and Finance, Queensland University of Technology)

  • Liu, Yang

    (Faculty of Business and Economics, University of Melbourne)

  • Noe, Thomas

    (Saıd Business School & Balliol College, University of Oxford)

  • Page, Lionel

    (School of Economics, University of Queensland)

Abstract

Risk-taking spurred by rank-based contest rewards can have enormous consequences, from breakthrough innovations in research competitions to hedge fund collapses engendered by risky bets aimed at raising league-table rankings. This paper provides a novel theoretical and experimental framework of rank-motivated risk-taking that both allows for complex prize structures and permits participants to make arbitrary mean-preserving changes to their random performance. As predicted by our theory, participants choose positively skewed performance under highly convex prize schedules and negatively skewed performance under concave ones. Convexifying the prize schedule or increasing competition for identical winner prizes induces riskier and more skewed performance.

Suggested Citation

  • Fang, Dawei & Ke, Changxia & Kubitz, Greg & Liu, Yang & Noe, Thomas & Page, Lionel, 2025. "Winning ways: How rank-based incentives shape risk-taking decisions," Working Papers in Economics 855, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0855
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    File URL: https://gupea.ub.gu.se/handle/2077/86838
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    More about this item

    Keywords

    rank incentives; risk taking; skewness; contest structure;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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