Strategic and Natural Risk in Entrepreneurship: An Experimental Study

Morgan, John; Orzen, Henrik; Sefton, Martín; Sisak, Dana

doi:10.1111/jems.12140

Cited by 26 publications

(19 citation statements)

References 44 publications

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“…In contrast to our study, their main focus is on the contest design aspects of different compensation schemes. Morgan et al (2012) also examine entry into different contests, and find that subjects sort themselves into risky types and safe types. Moreover, subjects' entry decisions are more consistent with theory in contests employing a share rule.…”

Section: Discussionmentioning

confidence: 99%

Overbidding and Overspreading in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules

2014

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We study experimentally the effects of cost structure and prize allocation rules on the performance of rent-seeking contests. Most previous studies use a lottery prize rule and linear cost, and find both overbidding relative to the Nash equilibrium prediction and significant variation of efforts, which we term 'overspreading.' We investigate the effects of allocating the prize by a lottery versus sharing it proportionally, and of convex versus linear costs of effort, while holding fixed the Nash equilibrium prediction for effort. We find the share rule results in average effort closer to the Nash prediction, and lower variation of effort. Combining the share rule with a convex cost function further enhances these results. We can explain a significant amount of non-equilibrium behavior by features of the experimental design. These results contribute towards design guidelines for contests based on behavioral principles that take into account implementation features of a contest.JEL Classifications: C72, C91, D72

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Section: Discussionmentioning

confidence: 99%

Overbidding and Overspreading in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules

2014

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“…There are many possible contest designs, but most theoretical models and most competitions created to elicit effort use winner-take-all incentives (Konrad, 2009). Despite widespread use of winnertake-all contests, a growing literature suggests that under some circumstances it is more beneficial to use payments proportional to relative performance (Cason et al, 2010;Shupp et al, 2013;Morgan et al, 2016). The first contribution of this paper is that we provide a unified theoretical and experimental framework to compare different contest designs and test how contestants respond to winner-take-all as opposed to proportional incentives.…”

Section: Introductionmentioning

confidence: 99%

“…For example, several early studies compare all-pay auctions to lottery contests (Davis and Reilly, 1998;Potters et al, 1998). Also, more recent studies compare behavior in lottery contests to proportional-prize contests (Fallucchi et al, 2013;Shupp et al, 2013;Chowdhury et al, 2014;Masiliunas et al, 2014;Morgan et al, 2016). We contribute to this literature by providing a generalized structure for comparing different types of contests, including all-pay auctions, rank-order tournaments, lottery contests and proportional-prize contests.…”

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confidence: 99%

Winner-take-all and proportional-prize contests: Theory and experimental results

Cason

Masters

Sheremeta

2020

Journal of Economic Behavior & Organization

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This study provides a unified framework to compare three canonical types of contests: winnertake-all contests won by the best performer, winner-take-all lotteries where probability of success is proportional to performance, and proportional-prize contests in which rewards are shared in proportion to performance. We derive equilibria and observe outcomes from each contest in a laboratory experiment. Equilibrium and observed efforts are highest in winner-takeall contests. Lotteries and proportional-prize contests have the same Nash equilibrium, but empirically, lotteries induce higher efforts and lower, more unequal payoffs. Behavioral deviations from theoretical benchmarks in different contests are caused by the same underlying attributes, such as risk-aversion and the utility of winning. Finally, we find that subjects exhibit consistent behavior across different types of contests, with subjects exerting higher effort in one contest also exerting higher effort in another contest.JEL Classifications: C72, D72, D74, J33

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“…The third strand is related to the experimental literature with endogenous entry in tournaments. The experimental studies on this topic can be grouped into three: The first group deals with contest entry decisions in which the outside option is a fixed wage 8 (Anderson and Stafford 2003;Fullerton et al 1999;Morgan, Orzen, and Sefton 2012;Morgan et al 2015). The second group studies contest entry decisions in which the outside option is piece rate (Balafautas, Kerschbamer, and Sutter 2012;Bartling et al 2009;Dohmen and Falk 2011;Eriksson, Teyssier, and Villeval 2009;Niederle and Vesterlund 2007), and the third group studies contest entry decisions in different contests by using the piece rate as the outside option (Cason, Masters, and Sheremeta 2010;Vandegrift, Yavas, and Brown 2007).…”

Section: Introductionmentioning

confidence: 99%

A Designer's Choice Between Single‐prize and Parallel Tournaments

Büyükboyacı

2016

Economic Inquiry

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In this article, I theoretically and experimentally compare a designer's profits from two tournament designs. The first design is a standard winner‐take‐all tournament with a single prize. The second design features two winner‐take‐all (parallel) tournaments with different prizes where individuals choose which tournament to enter before competing. I develop a simple model that illustrates how the relative performances of these designs change as contestants' abilities differ. The theoretical model shows that the designer's profit is higher (lower) in the parallel tournament when contestants' abilities differ greatly (are similar). I complement these findings with experimental evidence. The experiments show that the parallel tournament is more profitable under high heterogeneity, whereas under low heterogeneity, the designer is better off with the single‐prize tournament. Furthermore, high‐ability agents under‐participate and low‐ability agents over‐participate in the high‐prize tournament relative to the theoretical prediction. (JEL C72, D82, J33, M51, M52)

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Strategic and Natural Risk in Entrepreneurship: An Experimental Study

Cited by 26 publications

References 44 publications

Overbidding and Overspreading in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules

Overbidding and Overspreading in Rent-Seeking Experiments: Cost Structure and Prize Allocation Rules

Winner-take-all and proportional-prize contests: Theory and experimental results

A Designer's Choice Between Single‐prize and Parallel Tournaments

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