Optimal Risk Taking in an Uneven Tournament Game with Risk Averse Players

Matthias Kräkel

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We analyze the optimal choice of risk in a two-stage tournament game between two players that have different concave utility functions. At the first stage, both players simultaneously choose risk. At the second stage, both observe overall risk and simultaneously decide on effort or investment. The results show that those two effects which mainly determine risk taking — an effort effect and a likelihood effect — are strictly interrelated. This finding sharply contrasts with existing results on risk taking in tournament games with symmetric equilibrium efforts where such linkage can never arise. Hence, previous findings based on symmetry at the effort stage turn out to be nongeneric.

Keywords: asymmetric equilibria; rank-order tournaments; risk taking (search for similar items in EconPapers)
JEL-codes: C72 J3 L1 M5 (search for similar items in EconPapers)
Date: 2007-04
New Economics Papers: this item is included in nep-gth and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Optimal risk taking in an uneven tournament game with risk averse players (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:200

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