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Risk-bearing in a winner-take-all contest

Author

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  • Rtischev, Dimitry

Abstract

A parsimonious model is used to explore the risk-bearing decision under a payoff structure that emphasizes relative performance. Equilibrium betting amounts are derived for players who start with unequal endowments and face a lottery that offers either a positive or negative expected return. If the lottery offers negative expected return, disadvantaged players are willing to risk a portion of their endowment, and this induces advantaged players to also gamble, defensively. Although there are equilibria in which the advantaged preemptively gamble more than the disadvantaged, in the robust equilibrium it is the disadvantaged who make the larger bets. If the lottery offers positive expected return, there are equilibria in which the advantaged invest less than the disadvantaged, but full investment by all players is a more robust equilibrium.

Suggested Citation

  • Rtischev, Dimitry, 2008. "Risk-bearing in a winner-take-all contest," MPRA Paper 23302, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:23302
    as

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    File URL: https://mpra.ub.uni-muenchen.de/23302/1/MPRA_paper_23302.pdf
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    References listed on IDEAS

    as
    1. Hans K. Hvide, 2002. "Tournament Rewards and Risk Taking," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 877-898, October.
    2. Robson, Arthur J, 1992. "Status, the Distribution of Wealth, Private and Social Attitudes to Risk," Econometrica, Econometric Society, vol. 60(4), pages 837-857, July.
    3. Jack Hirshleifer, 1989. "Conflict and rent-seeking success functions: Ratio vs. difference models of relative success," Public Choice, Springer, vol. 63(2), pages 101-112, November.
    4. Robson, Arthur J., 1996. "The Evolution of Attitudes to Risk: Lottery Tickets and Relative Wealth," Games and Economic Behavior, Elsevier, vol. 14(2), pages 190-207, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    contest; tournament; relative evaluation; risk;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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