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Optimality of Winner-Take-All Contests: The Role of Attitudes toward Risk

Nicolas Treich () and Linqun Liu

No 21-1194, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper studies the role of risk attitudes in determining the optimality of winner-take-all contests. We compare the typical singlewinner lottery contest with two alternatives, both spreading the rewards to more players: through holding multiple prize-giving lottery competitions or through guaranteeing a bottom prize for the losers. In the first comparison, we find that the multiple-competition contest is as effective as the winner-take-all contest when the contestants are risk neutral, but the former induces more effort than the latter when the contestants are both risk averse and prudent. In the second comparison, we find that the contest with a bottom prize is always dominated by the winner-take-all contest when the contestants are risk neutral, but the former could have an advantage over the latter when the contestants are both risk averse and prudent, and it is more likely so as the contestants become more prudent.

Keywords: contests; winner take all; multiple prizes; risk aversion; prudence (search for similar items in EconPapers)
JEL-codes: C72 D72 D81 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-mic
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Working Paper: Optimality of Winner-Take-All Contests: The Role of Attitudes toward Risk (2019) Downloads
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