Gambling in Risk-Taking Contests: Experimental Evidence

This paper investigates whether contest schemes induce excessive risk-taking by implementing in the laboratory a novel stopping task based on the contest model of Seel and Strack (2013). In this stylized setting, managers who face contest payoffs have an incentive to delay halting projects with negative drift, with the induced inefficiency being highest for a moderately negative expectation. The experimental design 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 being 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 in the stopping task. This intrinsic motive and the strategic motive for excessive risk-taking appear to reinforce the non-monotonicity in subtly different ways. The experiment uncovers an interesting behavioural nuance in which contest incentives might crowd out an intrinsic inclination to gamble.

Working paper version available at: http://ssrn.com/abstract=3668143