Risk taking in winner-take-all competition

We analyze a two-stage game between two heterogeneous players. At stage one, risk is chosen by one of the players. At stage two, both players observe the given level of risk and simultaneously invest in a winner-take-all competition. The game is solved theoretically and then tested by using laboratory experiments. We find three effects that determine risk taking at stage one - a discouragement effect, a cost effect and a likelihood effect. For the likelihood effect, risk taking and investmentsare clearly in line with theory. Pairwise comparison shows that the cost effect seems to be more relevant than the discouragement effect when taking risk. -- Tournaments ; Competition ; Risk-Taking