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Risk-Taking Tournaments: Theory and Experimental Evidence

Author Info

  • Nieken, Petra

    ()

    (University of Bonn)

  • Sliwka, Dirk

    ()

    (University of Cologne)

Abstract

We study risk-taking behavior in a simple two person tournament in a theoretical model as well as a laboratory experiment. First, a model is analyzed in which two agents simultaneously decide between a risky and a safe strategy and we allow for all possible degrees of correlation between the outcomes of the risky strategies. We show that risk-taking behavior crucially depends on this correlation as well as on the size of a potential lead of one of the contestants. We find that the experimental subjects acted mostly quite well in line with the derived theoretical predictions.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3400.

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Length: 31 pages
Date of creation: Mar 2008
Date of revision:
Publication status: published in: Journal of Economic Psychology, 2010, 31 (3), 254-268
Handle: RePEc:iza:izadps:dp3400
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Keywords: risk-taking; competition; tournaments; experiment;

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Find related papers by JEL classification:
  • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - 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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  1. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-64, June.
  2. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February.
  3. Hvide, H.K. & Kristiansen, E.G., 1999. "Risk Taking in Selection Contests," Papers 5-99, Tel Aviv.
  4. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  5. Alannah Orrison & Andrew Schotter & Keith Weigelt, 2004. "Multiperson Tournaments: An Experimental Examination," Management Science, INFORMS, vol. 50(2), pages 268-279, February.
  6. Matthias Sutter & Christina Strassmair, 2007. "Communication, cooperation and collusion in team tournaments ? An experimental study," Working Papers 2007-19, Faculty of Economics and Statistics, University of Innsbruck.
  7. Hans K. Hvide, 2000. "Tournament Rewards and Risk Taking," Econometric Society World Congress 2000 Contributed Papers 0163, Econometric Society.
  8. Jeffrey Carpenter & Peter Hans Matthews & John Schirm, 2010. "Tournaments and Office Politics: Evidence from a Real Effort Experiment," American Economic Review, American Economic Association, vol. 100(1), pages 504-17, March.
  9. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
  10. Harbring, Christine & Irlenbusch, Bernd, 2003. "An experimental study on tournament design," Labour Economics, Elsevier, vol. 10(4), pages 443-464, August.
  11. Matthias Kräkel & Dirk Sliwka, 2001. "Risk Taking in Asymmetric Tournaments," Bonn Econ Discussion Papers bgse33_2001, University of Bonn, Germany.
  12. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
  13. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March.
  14. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  15. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  16. Anil Gaba & Ajay Kalra, 1999. "Risk Behavior in Response to Quotas and Contests," Marketing Science, INFORMS, vol. 18(3), pages 417-434.
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Cited by:

  1. Robert Shupp & Roman M. Sheremeta & David Schmidt & James Walker, 2013. "Resource Allocation Contests: Experimental Evidence," Working Papers 13-23, Chapman University, Economic Science Institute.
  2. Christos Genakos & Mario Pagliero, 2009. "Interim Rank, Risk Taking and Performance in Dynamic Tournaments," CEP Discussion Papers dp0928, Centre for Economic Performance, LSE.
  3. Eriksen, Kristoffer W. & Kvaløy, Ola, 2014. "Myopic risk-taking in tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 37-46.
  4. Charness, Gary & Kuhn, Peter J., 2010. "Lab Labor: What Can Labor Economists Learn from the Lab?," IZA Discussion Papers 4941, Institute for the Study of Labor (IZA).
  5. Eriksen, Kristoffer W & Kvaløy, Ola, 2015. "2015/01 No guts, no glory: An experiment on excessive risk-taking by Kristoffer W. Eriksen and Ola Kvaløy," UiS Working Papers in Economics and Finance 2015/1, University of Stavanger.
  6. Mueller-Langer, Frank & Andreoli-Versbach, Patrick, 2013. "Leading-effect vs. Risk-taking in Dynamic Tournaments: Evidence from a Real-life Randomized Experiment," Discussion Papers in Economics 15452, University of Munich, Department of Economics.
  7. Stéphane Robin & Katerina Straznicka & Marie Claire Villeval, 2012. "Bubbles and Incentives : An Experiment on Asset Markets," Working Papers halshs-00768434, HAL.
  8. Christos Genakos & Mario Pagliero, 2009. "Risk taking and performance in multistage tournaments: evidence from weightlifting competitions," LSE Research Online Documents on Economics 28599, London School of Economics and Political Science, LSE Library.
  9. Dijk, Oege & Holmen, Martin & Kirchler, Michael, 2014. "Rank matters–The impact of social competition on portfolio choice," European Economic Review, Elsevier, vol. 66(C), pages 97-110.

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