Risk Preference Heterogeneity in Group Contests
30 Pages Posted: 23 Jul 2020 Last revised: 3 Aug 2020
Date Written: July 31, 2020
We present and analyze the first model of a group contest with players that are heterogeneous in their risk preferences. In our model, individuals' preferences are represented by a utility function exhibiting a generalized form of constant absolute risk aversion, allowing us to consider any combination of risk-averse, risk-neutral, and risk-loving players. We begin by proving equilibrium existence and uniqueness under both linear and convex investment costs. Then, we explore how the sorting of a given set of players by their risk attitudes into competing groups affects aggregate investment. For the case of linear costs, we find that a balanced sorting of players (i.e., minimizing the variance in risk attitudes across groups) produces higher aggregate investment than an unbalanced sorting (i.e., maximizing the variance in risk attitudes across groups), and this continues to hold for a wide range of parameters when costs are convex. Thus, in the presence of relative performance incentives, our results largely support the conventional wisdom that team diversity promotes output.
Keywords: group contest, risk preference heterogeneity, sorting
JEL Classification: C72, D82
Suggested Citation: Suggested Citation