Abstract
We investigate, theoretically and experimentally, the effect of competition on risk taking in a contest in which players only decide on the level of risk they wish to take. Taking more risk implies a chance of a higher performance, but also implies a higher chance of failure. We vary the level of competition in two ways: by varying the number of players (2 players versus 8 players), and by varying the sensitivity of the contest to differences in performance (lottery contest versus all-pay auction). Our results show that there is a significant interaction effect between the two treatments, suggesting that players are particularly prone to take more risks if both the number of players and the sensitivity to performance are higher.
Highlights
Both in markets and in sports, players often compete for a single prize, be it a contract, an innovation, or a medal
We find no support for the hypothesis that the average levels of risk taking are higher with 8 players than with 2 players
In this paper we examine the impact of competition on risk taking in contests
Summary
Both in markets and in sports, players often compete for a single prize, be it a contract, an innovation, or a medal. Such settings are usually modeled as contests in which players can expend resources, such as effort, money, or time, to win a prize.. Players trade off the cost of the resource against an increased probability of winning the prize. Players can willingly increase the variance of possible outcomes. A player can increase the possibility that something good happens at the expense of an increase in the probability that something bad happens
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