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Optimality of winner-take-all contests: the role of attitudes toward risk

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  • Liqun Liu

    (Texas A&M University)

  • Nicolas Treich

    (University Toulouse Capitole)

Abstract

This paper studies the role of risk attitudes in determining the optimality of winner-take-all contests. We compare the typical single-winner 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.

Suggested Citation

  • Liqun Liu & Nicolas Treich, 2021. "Optimality of winner-take-all contests: the role of attitudes toward risk," Journal of Risk and Uncertainty, Springer, vol. 63(1), pages 1-25, August.
    • Handle: RePEc:kap:jrisku:v:63:y:2021:i:1:d:10.1007_s11166-021-09355-8
    DOI: 10.1007/s11166-021-09355-8
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    More about this item

    Keywords

    Contests; Winner-take-all; Multiple prizes; Risk aversion; Prudence;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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