2008-17 Adapting strategic risk in corporate tournaments

The way in which agents manipulate the distribution of performance outcomes in strategic settings has received increasing attention in the game theory literature. This paper uses an evolutionary approach to examine the optimal adaptation of strategic variability in corporate promotion tournaments. The model describes a situation in which agents are promoted to a higher salary based on observable performance, which depends stochastically on effort. Simulation results show that the optimal adaptation of risk-taking is highly dependent on the population mix. However, strategies that involve adapting risk early in the tournament are almost never part of an evolutionarily stable state, particularly when using uniform initial conditions. Results also show how managers can choose rank-order payoff schemes and tournament lengths to optimize with respect to risk-taking and effort.