Gambling in risk-taking contests: Experimental evidence

Matthew Embrey, Christian Seel and J. Philipp Reiss

Journal of Economic Behavior & Organization, 2024, vol. 221, issue C, 570-585

Abstract: This paper experimentally investigates risk taking in contest schemes by implementing a stopping task based on Seel and Strack (2013). In this stylized setting, managers with contest payoffs have an incentive to delay halting projects with a negative expectation, with the induced inefficiency being highest for a moderately negative drift. The experiment systematically varies the negative drift (between-subjects) and the payoff incentives (within-subject). We find evidence for risk taking in all our treatment conditions, with the non-monotonicity at least as pronounced as predicted. Contrary to the theoretical predictions, a similar pattern of behaviour persists even without contest incentives, suggesting contest incentives are not the only driver of risk-taking behaviour. Instead, observed behaviour violates expected utility maximization and is consistent with some intrinsic motivation for taking risk and myopic reasoning about the opponent. We explore the interplay between intrinsic incentives and the payment scheme and find that contest incentives might crowd out an intrinsic inclination to risk-taking.

Keywords: Contests; Relative performance pay; Risk-taking behaviour; Laboratory experiment (search for similar items in EconPapers)
JEL-codes: C72 C92 D81 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Gambling in Risk-Taking Contests: Experimental Evidence (2020)
Working Paper: Gambling in Risk-Taking Contests: Experimental Evidence (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:221:y:2024:i:c:p:570-585

DOI: 10.1016/j.jebo.2024.02.024

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