Risk Taking in Winner-Take-AllCompetition

We analyze a two-stage game between two heterogeneous players.At stage one, common risk is chosen by one of the players. At stagetwo, both players observe the given level of risk and simultaneouslyinvest in a winner-take-all competition. The game is solved theoreticallyand then tested by using laboratory experiments. We find threeeffects that determine risk taking at stage one — an effort effect, a likelihoodeffect and a reversed likelihood effect. For the likelihood effect,risk taking and investments are clearly in line with theory. Pairwisecomparison shows that the effort effect seems to be more relevant thanthe reversed likelihood effect when taking risk.[...]