Risk Taking in Asymmetric Tournaments

GEABA Working Paper No. 02-08

25 Pages Posted: 5 May 2002  

Matthias Kräkel

University of Bonn - Economic Science Area; Institute for the Study of Labor (IZA)

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Date Written: August 1, 2002

Abstract

A tournament is examined in which two agents with different abilities choose efforts as well as risks. According to the previous literature, the more (less) able agent should choose a low (high) risk strategy, because the first one does not want to imperil his favorable position, whereas the last one can only gain by increasing risk. We show that this is not necessarily true. Risk taking affects equilibrium efforts as well as winning probabilities. Depending on both effects diverse equilibria are possible. For example, the low and the high ability agent may both choose high risks or both choose low risks.

Keywords: effort effect, likelihood effect, risk taking, tournament

JEL Classification: D23, J3, M12

Suggested Citation

Kräkel, Matthias and Sliwka, Dirk, Risk Taking in Asymmetric Tournaments (August 1, 2002). GEABA Working Paper No. 02-08. Available at SSRN: https://ssrn.com/abstract=308543 or http://dx.doi.org/10.2139/ssrn.308543

Matthias Kräkel (Contact Author)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
BWLII
D-53113 Bonn
Germany
+49 228 73 92 11 (Phone)
+49 228 73 92 10 (Fax)

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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