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Ambiguity aversion as a reason to choose tournaments

Author

Listed:
  • Christian Kellner

    (University of Bonn)

  • Gerhard Riener

    (University of Jena and Max-Planck Institute of Economics, Jena)

Abstract

We test the implications of ambiguity aversion in a principal-agent problem with multiple agents. When output distributions are uncertain, models of ambiguity aversion suggest that tournaments may become more attractive than independent wage contracts, in contrast to the case where output distributions are known. We do so by presenting agents with a choice between tournaments and independent contracts, which are designed in a way that under uncertainty about output distribution (that is, under ambiguity), ambiguity averse agents should typically prefer tournaments, while ambiguity neutral agents prefer independent contracts, independent of their degree of risk aversion. This is the case, because the tournament removes all ambiguity about the equilibrium wages. We compare the share of participants who choose the tournament under ambiguity with the share of participants choosing the tournament in a control treatment, where output distributions are know. As the theory predicts, we find indeed that under ambiguity the share of agents who choose the tournaments is higher than in the case of known output distributions.

Suggested Citation

  • Christian Kellner & Gerhard Riener, 2011. "Ambiguity aversion as a reason to choose tournaments," Jena Economics Research Papers 2011-033, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2011-033
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    File URL: https://oweb.b67.uni-jena.de/Papers/jerp2011/wp_2011_033.pdf
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    References listed on IDEAS

    as
    1. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    2. Kellner, Christian, 2015. "Tournaments as a response to ambiguity aversion in incentive contracts," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 627-655.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Ambiguity aversion; tournaments; Ellsberg urn; contract design;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

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