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Tournament rewards and heavy tails

Mikhail Drugov () and Dmitry Ryvkin ()

No wp2017_05_01, Working Papers from Department of Economics, Florida State University

Abstract: Heavy-tailed fluctuations are common in many environments, such as sales of 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. 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. Rewarding all ranks but the very last is optimal for 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)
New Economics Papers: this item is included in nep-hrm and nep-mic
Date: 2017-05, Revised 2018-09
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ftp://econpapers.fsu.edu/RePEc/fsu/wpaper/wp2017_05_01.pdf Revised version, 2018-09 (application/pdf)

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