Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?

Michael Schwarz and Sergei Severinov

No 15136, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we study "investment tournaments," a class of decision problems that involve gradual allocation of investment among several alternatives whose values are subject to exogenous shocks. The decision-maker's payoff is determined by the final values of the alternatives. An important example of career tournaments motivating our research is the career choice problem, since a person choosing a career often starts by investing in learning several professions. We show that in a broad range of cases it is optimal for the decision-maker in each time period to allocate all resources to the most promising alternative. We also show that in tournaments for a promotion the agents would rationally put forth a higher effort in an early stage of the tournament in a bid to capture a larger share of employer's investment, such as mentoring.

JEL-codes: J24 J41 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-lab and nep-upt
Note: LS
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Citations: View citations in EconPapers (1)

Published as Michael Schwarz & Sergei Severinov, 2010. "Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?," Journal of Labor Economics, vol 28(4), pages 893-922.

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