Abstract:We study selection contests in which the strategic variable is degree of risk rather than amount of e¤ort. The selection e¢ciency of such contests is examined. We show that the selection e¢ciency of a contest may be improved by limiting the competition in two ways; a) by having a small number of contestants, and b) by restricting contestant quality. The results may contribute to our understanding of such diverse phenomena as promotion processes in …rms, selection of fund managers and research tournaments.
“…5 Previous works on risk taking in tournaments can be divided into two strands of literature (Nieken, 2010). A first stream of literature concentrates on the opportunity of agents (for example mutual fund managers) to decide about risk taking in order to raise their winning probability in a tournament (Brown et al, 1996;Chevalier and Ellison, 1997;Hvide and Kristiansen, 2003;Kempf et al, 2009;Qiu, 2003;Taylor, 2003). These papers leave out the effort stage in one-stage tournament models.…”
“…5 Previous works on risk taking in tournaments can be divided into two strands of literature (Nieken, 2010). A first stream of literature concentrates on the opportunity of agents (for example mutual fund managers) to decide about risk taking in order to raise their winning probability in a tournament (Brown et al, 1996;Chevalier and Ellison, 1997;Hvide and Kristiansen, 2003;Kempf et al, 2009;Qiu, 2003;Taylor, 2003). These papers leave out the effort stage in one-stage tournament models.…”
“…Therefore, this article is closely related to recent article s that consider the choice of risk in tournaments (Brown et al 1996;Chevalier and Ellison 1997;Gaba and Karla 1999;Hvide 2002;Hvide and Kristiansen 2003;Kräkel 2008;Taylor 2003). However, in these article s, the level of risk is chosen by the contestants not the contest designer.…”
“…Hvide and Kristiansen (2003) suggest that this aspect of fund managers' rewards, which are likely to be more important for younger managers (see Heinkel and Stoughton 1994), may lead to excessive risk taking by funds, for only a few funds at the top receive increased new financing. Hvide and Kristiansen (2003) suggest that this aspect of fund managers' rewards, which are likely to be more important for younger managers (see Heinkel and Stoughton 1994), may lead to excessive risk taking by funds, for only a few funds at the top receive increased new financing.…”
Section: Returns-based and Relative Performance-based Contractsmentioning
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