How Tournament Incentives Affect Asset Markets: A Comparison Between Winner-Take-All Tournaments and Elimination Contests

48 Pages Posted: 5 Apr 2016

See all articles by Dawei Fang

Dawei Fang

University of Gothenburg - Center For Finance; University of Gothenburg - Department of Economics

Martin Holmen

University of Gothenburg - Department of Economics; University of Gothenburg - Centre for Finance

Daniel Kleinlercher

University of Innsbruck

Michael Kirchler

University of Innsbruck

Date Written: February 10, 2016

Abstract

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

Fang, Dawei and Holmen, Martin and Kleinlercher, Daniel and Kirchler, Michael, How Tournament Incentives Affect Asset Markets: A Comparison Between Winner-Take-All Tournaments and Elimination Contests (February 10, 2016). Available at SSRN: https://ssrn.com/abstract=2758571 or http://dx.doi.org/10.2139/ssrn.2758571

Dawei Fang (Contact Author)

University of Gothenburg - Center For Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

University of Gothenburg - Department of Economics ( email )

Sweden

Martin Holmen

University of Gothenburg - Department of Economics ( email )

School of Business, Economics and Law
Box 640
Gothenburg, 40530
Sweden
+46 31 786 6442 (Phone)
+46 31 7865114 (Fax)

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Daniel Kleinlercher

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Michael Kirchler

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

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