Risk Taking in Contests and the Role of Carrots and Sticks

12 Pages Posted: 16 Jun 2009

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 Classification: J33, C72

Suggested Citation

Gilpatric, Scott M., Risk Taking in Contests and the Role of Carrots and Sticks. Economic Inquiry, Vol. 47, No. 2, pp. 266-277, April 2009. Available at SSRN: https://ssrn.com/abstract=1394059 or http://dx.doi.org/10.1111/j.1465-7295.2008.00155.x

Scott M. Gilpatric (Contact Author)

University of Tennessee ( email )

508 Stokely Management Center
Knoxville, TN 37996-0550
United States
865-974-1696 (Phone)

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