Risk and risk aversion effects in contests with contingent payments
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Contests by their very nature involve risk, winning and losing are both possible, and the gain from winning can itself be uncertain. The participants in a contest use resources to increase their chance of winning. The main focus of this analysis is on the effects of risk aversion and risk in contests where only winners pay for resources used to compete. When payment is contingent on winning, the effect of risk aversion is in the opposite direction of what occurs when costs are paid by both winners and losers. A number of contests observed in the marketplace that exhibit this contingent payment property are discussed.
KeywordsRisk aversion Contests Contingent payments Self-protection Ross risk aversion Downside risk aversion
JEL ClassificationsC72 D72 D81
We want to thank Adam Narkiewicz, Nicolas Treich, an anonymous reviewer, and the session participants at the 2017 EGRIE seminar in London, for very helpful comments and suggestions. All remaining errors are our own.
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