Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?

Michael Schwarz, Sergei Severinov

NBER Working Paper No. 15136
Issued in July 2009
NBER Program(s):Labor Studies Program

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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w15136

Published: Michael  Schwarz & Sergei  Severinov, 2010. "Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?," Journal of Labor Economics, vol 28(4), pages 893-922.

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