Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket? / Michael Schwarz, Sergei Severinov.

Format:

Book

Author/Creator:

Schwarz, Michael.

Contributor:

National Bureau of Economic Research.

Severinov, Sergei.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15136.

NBER working paper series no. w15136

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Investment Tournaments

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

In this paper we study "investment tournaments," a class of decision problems that involve gradual allocation of investment among several alternatives whose values are subject to exogenous shocks. The decision-maker's payoff is determined by the final values of the alternatives. An important example of career tournaments motivating our research is the career choice problem, since a person choosing a career often starts by investing in learning several professions. We show that in a broad range of cases it is optimal for the decision-maker in each time period to allocate all resources to the most promising alternative. We also show that in tournaments for a promotion the agents would rationally put forth a higher effort in an early stage of the tournament in a bid to capture a larger share of employer's investment, such as mentoring.

Notes:

Print version record

July 2009.