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Responses to risk in tournaments
Authors:Frederick W. Rankin  Todd L. Sayre
Affiliation:a College of Business, Colorado State University, 255 Rockwell Hall, Fort Collins, CO 80523, United States
b McLaren School of Business and Professional Studies, University of San Francisco, 2130 Fulton Street, San Francisco, CA 94117-1080, United States
Abstract:Due to their inefficient use of information, promotion incentives, which can be modeled as tournaments, can induce sub-optimal actions on the part of managers. This is a problem for firms because it leads to choices that do not maximize profit. This also can pose interpretation and comparison problems for research studies that employ tournament incentives. We demonstrate a situation where tournament incentives eliminate the effects of project risk on managers’ decisions as concerns with winning take precedence over concerns of maximizing expected profit. We also report the results of an experiment and find actual behavior to be fairly well explained by theoretical predictions. However, we find systematic deviations that lead to decisions that are more consistent with profit maximization than the economic theory predicts.
Keywords:LPS, linear profit sharing   RPE, relative performance evaluation
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