Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2016:37: Grind or Gamble? An Experimental Analysis of Effort and Spread Seeking in Contests

Ola Andersson (), Håkan J. Holm () and Erik Wengström ()
Additional contact information
Ola Andersson: Research Institute of Industrial Economics (IFN)
Håkan J. Holm: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Erik Wengström: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: We conduct a contest experiment where participants can invest in increasing both the mean and the spread of an uncertain performance variable. Subjects are treated with different prize schemes and in accordance with theory we observe substantial investments in spread. We find that both types of investments can be controlled with a three level prize scheme. However, the control is imperfect and behavior is characterized by inertia. The winner-take-all prize scheme has many disadvantages including high spread and heterogeneous behavior. The scheme where only one loser is punished appears superior; it generates high mean, low spread and is most popular.

Keywords: Contest; Risk; Spread; Incentives; Institutional Choice; Experiment

JEL-codes: C70; D02; D03; D80

66 pages, December 30, 2016

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