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Optimal Risk Taking in an Uneven Tournament Game with Risk Averse Players

  • Kräkel, Matthias

We analyze the optimal choice of risk in a two-stage tournament game between two players that have different concave utility functions. At the first stage, both players simultaneously choose risk. At the second stage, both observe overall risk and simultaneously decide on effort or investment. The results show that those two effects which mainly determine risk taking — an effort effect and a likelihood effect — are strictly interrelated. This finding sharply contrasts with existing results on risk taking in tournament games with symmetric equilibrium efforts where such linkage can never arise. Hence, previous findings based on symmetry at the effort stage turn out to be nongeneric.

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Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 200.

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Date of creation: Apr 2007
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Handle: RePEc:trf:wpaper:200
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  1. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March.
  2. Anja Schöttner, 2008. "Fixed-prize tournaments versus first-price auctions in innovation contests," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(1), pages 57-71, April.
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  4. 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.
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  7. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
  8. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
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  10. Hvide, H.K., 1999. "Tournament Rewards and Risk Taking," Papers 32-99, Tel Aviv.
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  12. Matthias Kräkel & Dirk Sliwka, 2004. "Risk Taking in Asymmetric Tournaments," German Economic Review, Verein für Socialpolitik, vol. 5(1), pages 103-116, 02.
  13. 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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  19. Dragon, Robert & Garvey, Gerald T. & Turnbull, Geoffrey K., 1996. "A collective tournament," Economics Letters, Elsevier, vol. 50(2), pages 223-227, February.
  20. Knoeber, Charles R & Thurman, Walter N, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 155-79, April.
  21. Richard Schmalensee, 1976. "A Model of Promotional Competition in Oligopoly," Review of Economic Studies, Oxford University Press, vol. 43(3), pages 493-507.
  22. repec:sae:ilrrev:v:43:y:1990:i:3:p:30-51 is not listed on IDEAS
  23. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December.
  24. Muller, Sigrid M. & Machina, Mark J., 1987. "Moment preferences and polynomial utility," Economics Letters, Elsevier, vol. 23(4), pages 349-353.
  25. Konrad, Kai A., 2007. "Strategy in contests: an introduction
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    ," Discussion Papers, Research Unit: Market Processes and Governance SP II 2007-01, Social Science Research Center Berlin (WZB).
  26. O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
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