Risk Taking in Contests and the Role of Carrots and Sticks

Abstract

"We study contests in which contestants choose both work effort and the variance of output (risk). Winner-take-all contests generate incentives for contestants to engage in costly risk taking, which is inefficient if the contest organizer values the aggregate output of all contestants. The addition of a penalty for ranking last (retaining a prize for ranking first) enables the organizer to independently control contestants' incentives to exert productive effort and to increase output variance. In this way, the organizer can eliminate risk-seeking behavior in settings where it is wasteful, but also control risk seeking when it is desirable, such as in research tournaments. "("JEL "J33, C72) Copyright (c) 2008 Western Economic Association International.

Relative performance information in asset markets: An experimental approach

“…Market participants' satisfaction ratings (1a) increase when a trader is the Leader, (1b) decrease when a trader is the Laggard, (1c) are lower for non-Leaders given Upward Reference information than for non-Laggards given Downward Reference information. Hvide (2002) offers a theoretical model showing that tournaments which provide a large reward for the winner create an incentive for rational agents to become more risk-seeking while Gilpatric (2009) extends this to show that tournaments with a penalty for the loser have the opposite effect. Since Hypotheses 1a and 1b posit that traders experience a utility reward for winning and a utility penalty for losing in addition to the utility they derive from their monetary reward, these models imply that rational traders exposed to Upward Reference information will be more risk-seeking (because they aspire to be the leader) than those exposed to Downward Reference information (who aspire to avoid being the loser) and hence will manifest a greater demand for the risky asset.…”

Incidence and Consequences of Risk‐taking Behavior in Tournaments—evidence From the Nba

“…Theoretical considerations (Gilpatric 2009) and experimental evidence (Gaba and Kalra 1999) indicate that the amount of risk-taking depends on the prize structure in rank-order tournaments in general. Theoretical considerations (Gilpatric 2009) and experimental evidence (Gaba and Kalra 1999) indicate that the amount of risk-taking depends on the prize structure in rank-order tournaments in general.…”

Grind or Gamble? An Experiment on Effort and Spread Seeking in Contests

“…This is the bad news. The good news is that both effort and spread choices can indeed be controlled to a certain extent with a three‐level prize scheme as suggested by Gilpatric (). However, the observed behavior is characterized by inertia and the theoretically predicted treatment differences are starker than the observed ones.…”

“…We find clear evidence of investments in spread, which supports the concern raised by Hvide even in a setting where increasing spread is costly. Furthermore, both effort and spread seeking can be controlled to a certain extent with a three‐level prize scheme as suggested by Gilpatric (). However, the observed behavior is characterized by inertia and the predicted treatment differences are starker than the observed ones.…”