Choosing Your Own Luck: Strategic Risk Taking and Effort in Contests

Abstract

We consider the problem of optimal contest design in an environment where contestants choose not only their effort, but also the distribution of shocks affecting their output. We show that the presence of such strategic risk taking has a stark effect on contest design: The winner-take-all contest, whereby the entire prize budget is allocated to the top performer, maximizes the expected effort (or output) of the agents \textit{regardless of the shape of their cost of effort}.