Tournament rewards and heavy tails
Mikhail Drugov and
Dmitry Ryvkin
Journal of Economic Theory, 2020, vol. 190, issue C
Abstract:
Heavy-tailed fluctuations are common in many environments, such as sales of creative and innovative products or the financial sector. We study how the presence of heavy tails in the distribution of shocks affects the optimal allocation of prizes in rank-order tournaments à la Lazear and Rosen (1981). While a winner-take-all prize schedule maximizes aggregate effort for light-tailed shocks, prize sharing becomes optimal when shocks acquire heavy tails, increasingly so following a skewness order. Extreme prize sharing—rewarding all ranks but the very last—is optimal when shocks have a decreasing failure rate, such as power laws. Hence, under heavy-tailed uncertainty, typically associated with strong inequality in the distribution of gains, providing incentives and reducing inequality go hand in hand.
Keywords: Heavy tails; Power law; Tournament; Optimal allocation of prizes; Failure rate (search for similar items in EconPapers)
JEL-codes: C72 D86 M52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053120301095
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Tournament Rewards and Heavy Tails (2018) 
Working Paper: Tournament Rewards and Heavy Tails (2018) 
Working Paper: Tournament rewards and heavy tails (2018) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:190:y:2020:i:c:s0022053120301095
DOI: 10.1016/j.jet.2020.105116
Access Statistics for this article
Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell
More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().