Tournament Rewards and Risk Taking

Hans Hvide

Working Papers from Tel Aviv

Abstract: I consider two seemingly unrelated puzzles; 1. Why is relative performance evaluation (RPE) used less in CEo compensation than agency theory suggests? 2. Why is sometimes, e.g., for fund managers, a mediocre performance more highly rewarded than excellence? I consider a simple tournament model, where agents can influence the spread of output in addition to its mean. Ishow that standard tournament rewards induce risky and lazy behavior from the agents. This finding sheds light on Puzzle 1. Second, I consider a scheme that ranks agents according to their relative closeness to a benchmark k. I show that there exists intermediate values of k such that the risky-lazy problem of the standard tournament can be mitigated. This result sheds light on Puzzle 2.

Keywords: RISK; ECONOMIC MODELS; BEHAVIOUR (search for similar items in EconPapers)
JEL-codes: C50 D81 (search for similar items in EconPapers)
Pages: 19 pages
Date: 1999
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Citations: View citations in EconPapers (9)

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Journal Article: Tournament Rewards and Risk Taking (2002)
Working Paper: Tournament Rewards and Risk Taking (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:teavfo:32-99

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