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Gambling in Risk-Taking Contests: Experimental Evidence

Matthew Embrey, Christian Seel and J. Philipp Reiss

No 25, Research Memorandum from Maastricht University, Graduate School of Business and Economics (GSBE)

Abstract: This paper experimentally investigates excessive risk taking in contest schemes by implementing a novel 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 excessive risk taking in all our treatment conditions, with the non-monotonicity at least as problematic as predicted. Contrary to the theoretical predictions, this aggregate pattern of behaviour is seen even without contest incentives. Further analysis suggests that many subjects display behaviour consistent with some intrinsic motivation for taking risk. This intrinsic motive and the strategic motive for excessive risk taking reinforce the non-monotonicity. The experiment uncovers a behavioural nuance where contest incentives crowd out an intrinsic inclination to gamble.

JEL-codes: C72 C92 D81 (search for similar items in EconPapers)
Date: 2020-09-22
New Economics Papers: this item is included in nep-exp and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:unm:umagsb:2020025

DOI: 10.26481/umagsb.2020025

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