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Expectation-based loss aversion and rank-order tournaments

Simon Dato (), Andreas Grunewald () and Daniel Müller ()
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Simon Dato: University of Bonn
Andreas Grunewald: University of Bonn
Daniel Müller: University of Würzburg

Economic Theory, 2018, vol. 66, issue 4, 901-928

Abstract: Abstract Many insights regarding rank-order tournaments rest upon contestants’ behavior in symmetric equilibria. As shown by Gill and Stone (Games Econ Behav 69:346–364, 2010), however, symmetric equilibria may not exist if contestants are expectation-based loss averse and have choice-acclimating expectations. We show that under choice-unacclimating—i.e., fixed—expectations both symmetric and asymmetric equilibria exist for all degrees of loss aversion. Importantly, a symmetric equilibrium also exists if players follow their preferred credible plan and the weight attached to psychological gain–loss utility does not strongly outweigh the weight put on material utility. Hence, for fixed expectations a focus on symmetric equilibria seems justifiable even if contestants are expectation-based loss averse.

Keywords: Expectation-based loss aversion; Rank-order tournament; Reference-dependent preferences (search for similar items in EconPapers)
JEL-codes: C72 D81 D91 (search for similar items in EconPapers)
Date: 2018
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