How Tournament Incentives Affect Asset Markets: A Comparison Between Winner-Take-All Tournaments and Elimination Contests
48 Pages Posted: 5 Apr 2016
Date Written: February 10, 2016
We investigate the impact of fund 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 fund 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 fund 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.
Keywords: tournament incentives, investment behavior, market efficiency, experimental finance
JEL Classification: C72, C91, C92, G11
Suggested Citation: Suggested Citation