RISK TAKING IN CONTESTS AND THE ROLE OF CARROTS AND STICKS |
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| Authors: | SCOTT M. GILPATRIC |
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| Affiliation: | Gilpatric:;Assistant Professor, Department of Economics, Center for Corporate Governance, University of Tennessee, 505A Stokely Management Center, Knoxville, TN 37996. Phone 1-865-974-1696, Fax 1-865-974-4601, E-mail . |
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| 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) |
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