Gambling in risk-taking contests: Experimental evidence

This paper experimentally investigates risk taking in contest schemes by implementing a stopping task based on Seel and Strack (2013). In this stylized setting, managers with contest payoffs have an incentive to delay halting projects with a negative expectation, with the induced inefficiency being...

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Bibliographic Details
Published in:Journal of economic behavior & organization 2024-05, Vol.221, p.570-585
Main Authors: Embrey, Matthew, Seel, Christian, Philipp Reiss, J.
Format: Article
Language:English
Subjects:
Contests
Laboratory experiment
Relative performance pay
Risk-taking behaviour
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Summary:This paper experimentally investigates risk taking in contest schemes by implementing a stopping task based on Seel and Strack (2013). In this stylized setting, managers with contest payoffs have an incentive to delay halting projects with a negative expectation, with the induced inefficiency being highest for a moderately negative drift. The experiment systematically varies the negative drift (between-subjects) and the payoff incentives (within-subject). We find evidence for risk taking in all our treatment conditions, with the non-monotonicity at least as pronounced as predicted. Contrary to the theoretical predictions, a similar pattern of behaviour persists even without contest incentives, suggesting contest incentives are not the only driver of risk-taking behaviour. Instead, observed behaviour violates expected utility maximization and is consistent with some intrinsic motivation for taking risk and myopic reasoning about the opponent. We explore the interplay between intrinsic incentives and the payment scheme and find that contest incentives might crowd out an intrinsic inclination to risk-taking.
ISSN:0167-2681
1879-1751
DOI:10.1016/j.jebo.2024.02.024