The effect of competition on risk taking in contests

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