Responses to risk in tournaments

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 proble...

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Bibliographic Details
Published inAccounting, organizations and society Vol. 36; no. 1; pp. 53 - 62
Main Authors Sayre, Todd L, Rankin, Frederick W
Format Journal Article
LanguageEnglish
Published Oxford Elsevier 2011
Pergamon Press Inc
SeriesAccounting, Organizations and Society
Subjects
Accounting
Business management
Decisions
Deviation
Economic incentives
Economic theory
Economics
Experiments
Incentives
Information
Management techniques
Maximization
Occupational promotion
Profit maximization
Promotion
Risk
Risk management
Studies
Tournaments & championships
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Summary: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.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0361-3682
1873-6289
DOI:10.1016/j.aos.2010.12.001