How tournament incentives affect asset markets: A comparison between winner-take-all tournaments and elimination contests |
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| Institution: | 1. Department of Economics, University of Bath, Claverton Down, Bath, BA2 7AY, United Kingdom;2. Department of Economics, University of Dortmund (TU), Vogelpothsweg 87, Dortmund 44227, Germany;3. Department of Economics, University of Bonn, Lennéstr. 37, Bonn 53113, Germany;1. Department of Finance, Stern School of Business, New York University, 44 West 4th Street, Room 9–84, New York NY 10012, United States;2. Department of Banking and Finance, Monash Business School, Monash University, Wellington Road, Clayton, Victoria 3800, Australia |
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| Abstract: | We investigate the impact of investment managers׳ tournament incentives on investment strategies and market efficiency, distinguishing between winner-take-all tournaments (WTA), where a minority wins, and elimination contests (EC), where a majority wins. Theoretically, we show that investment managers play heterogeneous strategies in WTA and homogeneous strategies in EC, and markets are more prone to mispricing in WTA than in EC. Experimentally, we find that investment managers play more heterogeneous strategies in WTA than in EC, but this does not trigger significant differences in prices. Moreover, prices in WTA and EC do not differ significantly from markets composed of linearly incentivized subjects. |
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| Keywords: | Tournament incentives Investment behavior Market efficiency Experimental finance C91 C92 G02 G14 |
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