Tournament Rewards and Risk Taking ¤

@inproceedings{Hvide1999TournamentRA,
  title={Tournament Rewards and Risk Taking ¤},
  author={Hans K. Hvide},
  year={1999}
}
I consider two seemingly unrelated puzzles; 1.Why is relative performance evaluation (RPE) used less in CEO compensation than agency theory suggests? 2.Why is sometimes, e.g., for fund managers, a mediocre performance more highly rewarded than excellence? I consider a simple tournament model, where agents can in‡uence the spread of output in addition to its mean. I show that standard tournament rewards induce risky and lazy behavior from the agents. This ...nding sheds light on Puzzle 1. Second… CONTINUE READING
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