Risk Preference Heterogeneity in Group Contests

41 Pages Posted: 23 Jul 2020 Last revised: 4 Feb 2021

See all articles by Philip Brookins

Philip Brookins

University of South Carolina

Paan Jindapon

The University of Alabama

Date Written: July 31, 2020

Abstract

We 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 compatible set of players by their risk attitudes into competing groups affects aggregate investment. With linear costs, a balanced sorting (i.e., minimizing the variance in risk attitudes across groups) always produces an aggregate investment level that is at least as high as an unbalanced sorting (i.e., maximizing the variance in risk attitudes across groups). Under convex costs, however, identifying which sorting is optimal is more nuanced and depends on preference and cost parameters.

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

The University of Alabama ( email )

Department of Economics
Box 870224
Tuscaloosa, AL 35487
United States

HOME PAGE: http://https://pjindapon.people.ua.edu/

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