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Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?

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  • Michael Schwarz
  • Sergei Severinov

Abstract

In this paper we study "investment tournaments," a class of decision problems that involve gradual allocation of investment among several alternatives whose values are subject to exogenous shocks. The decision-maker's payoff is determined by the final values of the alternatives. An important example of career tournaments motivating our research is the career choice problem, since a person choosing a career often starts by investing in learning several professions. We show that in a broad range of cases it is optimal for the decision-maker in each time period to allocate all resources to the most promising alternative. We also show that in tournaments for a promotion the agents would rationally put forth a higher effort in an early stage of the tournament in a bid to capture a larger share of employer's investment, such as mentoring.

Suggested Citation

  • Michael Schwarz & Sergei Severinov, 2009. "Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?," NBER Working Papers 15136, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15136
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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