Peer Information and Risk-Taking Under Competitive and Non-Competitive Pay Schemes

44 Pages Posted: 8 Aug 2016 Last revised: 11 Jun 2022

See all articles by Philip Brookins

Philip Brookins

University of South Carolina

Jennifer Brown

University of Utah - Department of Finance

Dmitry Ryvkin

Florida State University

Date Written: August 2016

Abstract

Incentive schemes that reward participants based on their relative performance are often thought to be particularly risk-inducing. Using a novel, real-effort task experiment in the laboratory, we find that the relationship between incentives and risk-taking is more nuanced and depends critically on the availability of information about peers’ strategies and outcomes. Indeed, we find that when no peer information is available, relative rewards schemes are associated with significantly less risk-taking than non-competitive rewards. In contrast, when decision-makers receive information about their peers’ actions and/or outcomes, relative incentive schemes are associated with more risk-taking than non-competitive schemes. The nature of the feedback—whether subjects receive information about peers’ strategies, outcomes, or both—also affects risk-taking. We find no evidence that competitors imitate their peers when they face only feedback about other subjects’ risk-taking strategies. However, decision-makers take more risk when they see the gaps between their performance score and their peers’ scores grow. Combined feedback about peers’ strategies and performance—from which subjects may assess the overall relationship between risk-taking and success—is associated with more risk-taking when rewards are based on relative performance; we find no similar effect for non-competitive rewards.

Suggested Citation

Brookins, Philip and Brown, Jennifer and Ryvkin, Dmitry, Peer Information and Risk-Taking Under Competitive and Non-Competitive Pay Schemes (August 2016). NBER Working Paper No. w22486, Available at SSRN: https://ssrn.com/abstract=2819891

Philip Brookins (Contact Author)

University of South Carolina ( email )

Department of Economics
1014 Greene St
Columbia, SC 29208
United States
8037773603 (Phone)

HOME PAGE: http://philipbrookins.com

Jennifer Brown

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Dmitry Ryvkin

Florida State University ( email )

Tallahassee, FL 30306-2180
United States

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