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Risk-Taking Tournaments: Theory and Experimental Evidence

  • Nieken, Petra

    ()

    (University of Bonn)

  • Sliwka, Dirk

    ()

    (University of Cologne)

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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File URL: http://ftp.iza.org/dp3400.pdf
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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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  1. Hans K. Hvide, 2000. "Tournament Rewards and Risk Taking," Econometric Society World Congress 2000 Contributed Papers 0163, Econometric Society.
  2. Hvide, H.K. & Kristiansen, E.G., 1999. "Risk Taking in Selection Contests," Papers 5-99, Tel Aviv.
  3. Jerry R. Green & Nancy L. Stokey, 1982. "A Comparison of Tournaments and Contracts," NBER Working Papers 0840, National Bureau of Economic Research, Inc.
  4. 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.
  5. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March.
  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. Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  9. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1985. "Tournaments and Piece Rates: An Experimental Study," Working Papers 85-21, C.V. Starr Center for Applied Economics, New York University.
  10. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  11. Alannah Orrison & Andrew Schotter & Keith Weigelt, 2004. "Multiperson Tournaments: An Experimental Examination," Management Science, INFORMS, vol. 50(2), pages 268-279, February.
  12. Harbring, Christine & Irlenbusch, Bernd, 2003. "An experimental study on tournament design," Labour Economics, Elsevier, vol. 10(4), pages 443-464, August.
  13. Anil Gaba & Ajay Kalra, 1999. "Risk Behavior in Response to Quotas and Contests," Marketing Science, INFORMS, vol. 18(3), pages 417-434.
  14. 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.
  15. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  16. Matthias Kräkel & Dirk Sliwka, 2004. "Risk Taking in Asymmetric Tournaments," German Economic Review, Verein für Socialpolitik, vol. 5(1), pages 103-116, 02.
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