We fill a gap in the literature of asymmetric tournament by exploring risk manipulating behavior of the principal. In our model with heterogeneous agents and limited liability, a principal can manipulate the level of risk so that the performance of each agent becomes less or more uncertain. Our result shows that there exists an optimal risk level from the principal’s standpoint of maximizing expected profit. Our model and its implications help to explain why organizations conducting similar businesses have different performance measure standards with different precision or accuracy.
