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Contests as selection mechanisms: The impact of risk aversion

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  • March, Christoph
  • Sahm, Marco

Abstract

We investigate how individual risk preferences affect the likelihood of selecting the more able contestant within a two-player Tullock contest. Our theoretical model yields two main predictions: First, an increase in the risk aversion of a player worsens her odds unless she already has a sufficiently large advantage. Second, if the prize money is sufficiently large, a less able but less risk averse contestant can achieve an equal or even higher probability of winning than a more able but more risk averse opponent. In a laboratory experiment we confirm both, the non-monotonic impact and the compensating effect of risk aversion on winning probabilities. Our results suggest a novel explanation for the gender gap and the optimality of limited monetary incentives in selection contests.

Suggested Citation

  • March, Christoph & Sahm, Marco, 2017. "Contests as selection mechanisms: The impact of risk aversion," BERG Working Paper Series 127, Bamberg University, Bamberg Economic Research Group.
  • Handle: RePEc:zbw:bamber:127
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    Cited by:

    1. Martin, Carolin & Westerhoff, Frank, 2018. "Regulating speculative housing markets via public housing construction programs: Insights from a heterogeneous agent model," BERG Working Paper Series 135, Bamberg University, Bamberg Economic Research Group.
    2. Hommes, Cars & Lustenhouwer, Joep & Mavromatis, Kostas, 2018. "Fiscal consolidations and heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 173-205.
    3. repec:ebl:ecbull:eb-17-00215 is not listed on IDEAS
    4. Lustenhouwer, Joep & Mavromatis, Kostas, 2017. "Fiscal consolidations and finite planning horizons," BERG Working Paper Series 130, Bamberg University, Bamberg Economic Research Group.
    5. Hommes, Cars H. & Lustenhouwer, Joep, 2017. "Managing unanchored, heterogeneous expectations and liquidity traps," BERG Working Paper Series 131, Bamberg University, Bamberg Economic Research Group.

    More about this item

    Keywords

    Selection Contest; Risk Aversion; Competitive Balance; Gender Gap;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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