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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
    as

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    File URL: https://gupea.ub.gu.se/handle/2077/86838
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    References listed on IDEAS

    as
    1. Douglas W. Diamond & Raghuram G. Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," American Economic Review, American Economic Association, vol. 99(2), pages 606-610, May.
    2. 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.
    3. Fang, Dawei & Holmén, Martin & Kleinlercher, Daniel & Kirchler, Michael, 2017. "How tournament incentives affect asset markets: A comparison between winner-take-all tournaments and elimination contests," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 1-27.
    Full references (including those not matched with items on IDEAS)

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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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