Risk Preference Heterogeneity in Group Contests

30 Pages Posted: 23 Jul 2020 Last revised: 3 Aug 2020

See all articles by Philip Brookins

Philip Brookins

University of South Carolina

Paan Jindapon

University of Alabama

Date Written: July 31, 2020

Abstract

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

Brookins, Philip and Jindapon, Paan, Risk Preference Heterogeneity in Group Contests (July 31, 2020). Available at SSRN: https://ssrn.com/abstract=3624886 or http://dx.doi.org/10.2139/ssrn.3624886

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

Paan Jindapon

University of Alabama ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

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