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Published December 2018 | Submitted
Journal Article Open

The second-tier trap: Theory and experimental evidence

Kim, Duk Gyoo

Abstract

Winner‐take‐all competitions can lead to the person in the second‐tier (middle‐tier) environment having the worst expected payoff when players exclusively choose their environment and exert effort before their random, heterogeneous environmental supports are realized. The tiers are defined by the ranks in pairwise competitions. The second‐tier trap (STT) is a situation in which a player from the second‐tier environment has the worst expected payoff even though his expected environmental support is strictly greater than that of the third‐tier player. A sufficient condition for the STT is that the ex‐ante advantages, the winning probabilities when all the players exert the same amount of effort regardless of their environment, are the same for those two environments. I claim that this sufficient condition for the STT is so weak that players can easily be tempted to choose the second‐tier environment, which is the wrong decision. Lab experiments strongly support this claim.

Additional Information

© 2018 IAET. Issue Online: 02 November 2018; Version of Record online: 28 May 2018; Manuscript accepted: 06 April 2017. I would especially like to thank an anonymous referee, Robert H. Frank, and Stephen Coate. I also thank John Abowd, Marco Battaglini, Larry Blume, Ted O'Donoghue, Pradeep Dubey, Alex Imas, Jun Sung Kim, Sang-Hyun Kim, William D. Schulze, and Rasmus Wiese for their helpful comments. I gratefully acknowledge financial support from the Cornell Population Center and William D. Schulze. All the remaining errors are mine.

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August 22, 2023
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